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.