Getting Compliance More Comfortable Around Your ERISA Practice


Many compliance departments seem to wish that their advisors would just stay out of the ERISA space. And it is not exactly without merit. Let’s be honest: ERISA is complicated and somewhat convoluted in practice. Take the simple concept of paying someone for his services. ERISA explicitly says it is not permissible. But then goes back to add categorical exemptions if certain criteria are met. Necessary, reasonable…you know what they are.

From a compliance perspective, there are some significant areas in which even a well-intentioned advisor can run afoul. Recently we have seen several cases with staggering settlements hit some of the big players. It doesn’t take a genius to overlay what happened in medicine to our beloved field. The litigation typically starts with the low hanging fruit and the deepest pockets. It then works its way through the rest of the market using fear and prior cases to strengthen its position. And I see three current situations that would give some cause for concern. They are excessive fees, 408(b)(2) disclosure of statement of services, and false security under 404(c).

Excessive fees are a matter of perspective. Some people say that a Mercedes Benz is far too expensive; but the company’s continued sales numbers support the position that others are clearly willing to pay for it knowingly. And 401(k) fees are a subject that any prudent fiduciary should closely be examining. But as compliance people, shouldn’t we be looking at ways to defend the fees of our advisors in the field instead of knee jerk requests for them to slash their paychecks? I would suggest that a platform to demonstrate to the plan sponsor that the fees are clearly justified given all of the work and expertise that goes into a plan. After all, a fiduciary is not charged with hiring the cheapest provider.

The second issue that could be cause for concern is having a 408(b)(2) disclosure containing a list of services intended that conflicts with the services actually provided. Under this section of our beloved Code, a fiduciary has an obligation to collect a disclosure from every covered service provider and to justify that the fees charged are commensurate with the level of service being provided. But what worries me is a situation in which a disclosure outlines that the advisor, for example, will provide a given service and fails to do so in practice. But, realistically, how is a compliance department going to track to make sure that everything matches?

Right now our clients have false security under 404(c). Hate it or love it, this code section comes up all the time. My first exposure was an advisor preaching to me that actual protection was impossible, so don’t even try (you don’t want to say something on the 5500 that you can’t back up). I have heard some say it is better to try and fall short because it shows that you are trying. And there are service providers who push hard for it. From my vantage point, the real trick with 404(c) is documenting that all of these parts are happening. I’ll give you an example. If you think you are compliant, prove to me beyond a shadow of a doubt that a participant was provided appropriate education (a low minimum of mutual fund 1 page fact sheets) at enrollment. Show me a calendar that had attendance and a dated copy of the enrollment book. My fear is that those who cannot provide this documentation may be in for a surprise when they try to invoke coverage in court. It would be a shame to cover so many pieces of 404(c) to fall short (and pay big) due to lack of documentation.

Before those of you in compliance go running out to buy a case of Pepto to work through these issues, we have a way to solve these problems. QPSteno.

QPSteno allows a service provider to track his time, activity, and interactions with a given plan. When you marry this information about time spent with fees earned (which the system does), you get an effective hourly rate or project rate. That is more defensible than a gross number. And it is good PR for the advisor and the firm. You now have a chance to showcase to your client everything that your firm does for him, not just what he sees in the board room. Additionally, compliance can rest easy knowing that we are not inadvertently putting the firm at risk with our actions.

Secondly, by tracking the actual activities, you can compare the information back to the 408(b)(2) disclosures to be sure that the advisors are providing the services stated. This allows for a midyear correction, for example, before there is any conflict/violation at the end of the year. It is also allows the firm to update the disclosure if there are additional services that are being provided, thus creating a potential opportunity for an advisor to negotiate a new compensation agreement for his increased services. And compliance can feel confident that we are living what we sold the client.

Finally, documentation of activities for 404(c) is easier. I agree that satisfying this section of the code is tough. However, given the right systems, it is attainable and worth attempting. QPSteno allows for the tracking of activities and interactions. Thus, an enrollment meeting, for example, could be tracked with attendance and an electronic copy of the enrollment kit. In documenting this activity, a plan sponsor now has the final piece required for exemption under 404(c). As the litigation against 401k plans continues, our clients are going to be tested. And compliance is going to be happy when a suit can be potentially dismissed in discovery, rather than a lengthy and expensive legal battle.

Much of this probably seems basic. As service providers, we all know what our time and skills are worth. And we know what services we provide to include on disclosures. And we know that the education component is covered. But as one of my former bosses used to say, “If you don’t mark it, it didn’t happen”. Taking the time to show our clients that we are diligent in our endeavors can only help cement our positions as the professionals that we are.

Trading Employee Engagement for Auto Features


The growing trend in retirement plans is toward the automatic. Auto-enrollment. Auto-escalation. Auto-rebalance. QDIAs. The benefits of these features are well documented. Studies like this one (here) show how automatic features seem to better prepare employees to replace their normal working wages than plans without these features.

But is there a trade off? Are we breeding apathy into these plans and using the apathy as the rationale for implementing these features?

Studies like one from the EBRI referenced above show that under their calculations, the employees will have better balances at retirement than those under plans without automatic features. For a moment, let’s assume that the other assumptions in those studies do not categorically disqualify them. But let’s look at the aspects that the study does not cover.

First,there is an assumption that participants will either stay in one job or maintain their accounts without cashing them in when changing jobs or take loans. In reality, we know that this happens. And it happens a lot. So much so that the Government Accountability Office mentions it in at least two separate studies (here and here). Cashing out costs employees in current taxes as well as retirement security.

Conversely, not rolling the balance to a new employer costs employers who pay recordkeepers and TPAs a per participant charge. Or it can cost the participant if those charges are passed along to the employee. There are provisions to roll smaller balances out of plans automatically, either to an IRA or a complete cash out. But are those provisions putting employees in a position to be better off in retirement than just staying in the plan? Depending on several variables, the participant may have lower expenses by staying in the plan.

Second, let’s assume that the participant gets to retirement with a bolstered balance due to automatic enrollment. I would suggest that participants who have not been properly engaged throughout the process (saving for retirement) are not appropriately trained to handle the control of such a large amount of money. While having lunch several years ago, I struck up a conversation with the man sitting next to me. Inevitably, the subject of work came up. After learning what I did, he shared with me what he had done with his retirement funds.

“I worked my whole life; I worked hard. And I did a good job saving. I retired with $150,000 in my 401k. So you know what I did? I treated myself to a new Cadillac.”

To be fair, I have no idea what other assets the man had. But it is conversations like this that leads the government to allow annuity features in retirement plans. And it causes others to wax nostalgic about how great pensions were. The reality is that people who have not been properly educated about financial matters who suddenly have access to a large pool of money tend to make bad decisions. Don’t believe me? A majority of people who win the lottery lose most of their new wealth within several years. And the same is true for professional athletes.

So the question becomes: Are we doing an unintended disservice to the participants in plans by removing steps of the process from their control? We know that financial education is not being taught in most schools. And we know that there are blind spots in participants understanding of finance. At least the old enrollment process gave us a chance to speak with the participants about how different asset classes and dollar cost averaging works. It gave them a chance to ask questions about financial subjects. If we are going to continue to automate other features of the plan, maybe some other activities could take their place. Should we be mandating that, in lieu of the standard enrollment meeting, there be some sort of financial education component? Should we redefine the educational component of 404(c) to make participants more financially savvy? As financial services professionals, what else can we do to help prepare participants for retirement?