PANC 2012: Cross Selling — Traps for the Unwary

It’s possible to broaden your practice successfully without running afoul of the rules, Roberta Ufford, principal at Groom Law Group, told conference attendees.

Plan sponsors usually accept fiduciary roles when they act as plan administrator or “named fiduciary” for investments. But “settler” activities are not fiduciary activities. An adviser may be a fiduciary when he or she is a 3(38) or 3(21) adviser. Fiduciaries are defined functionally by their professional actions. A person is a fiduciary if they:

  • Exercise discretionary authority or control in the management of a plan;
  • Exercise authority or control concerning the management of plan assets;
  • Have discretionary authority or responsibility for plan administration; or
  • Render investment advice in return for a fee.

Under the rules of the Employee Retirement Income Security Act (ERISA), plans are prohibited from receiving services and paying fees to a party in interest unless certain conditions are met. The services must be necessary and appropriate. Plans must be deemed reasonable. In an arrangement that is reasonable under the terms of ERISA section 408(b)(2), the provider must deliver fee disclosures and the arrangement must be terminable on reasonably short notice.

Self-interest is one of the pitfalls to watch for, according to Ufford. Provisions under ERISA 406(b) prohibit plan fiduciaries from causing a plan to engage in a transaction if the transaction might benefit the fiduciary (or someone in whom the fiduciary has an interest). Another prohibition would be if the fiduciary also acts on behalf of a person with interests that are in opposition to the interests of the plan or if the fiduciary would receive a kickback or other benefit from a third party.

Examples of cross-selling to sponsors include total benefits outsourcing such as 401(k) services bundled with payroll and nonqualified plan administration. In relationship banking, a bank might attempt to tie the sponsor’s credit line to the bank’s engagement to provide services to the plan. An investment manager’s relationship discount takes into account multiple accounts, including plan as well as non-plan assets.

In cross-selling to sponsors, a number of considerations must be evaluated. When a plan pays expenses using plan assets, the plan must be authorized to pay under governing plan documents. The services must be appropriate for the plan, and the amount paid must be reasonable. The provider must deliver required information, and the arrangement must not involve any fiduciary self-dealing or conflicts of interest. Examples of acceptable costs include those incurred by a fiduciary in the carrying-out of fiduciary plan duties, such as those of plan administration, trustee expenses and investment expenses.

Services provided to a different plan or third party would not fall into that category, nor would services that are not reasonably necessary to carrying out costs of the plan or that are provided for the employer’s benefit.

The bottom line, Ufford said, is that the sponsor has to be able to benchmark and show that expenses benefit the plan or are necessary to its administration. Ideally service providers and sponsors will not link plan and non-plan services.