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.

The Iceberg of Retirement Plan Service


Everyone has seen the motivational posters with the iceberg, complete with the requisite statement about how there is so much below the surface.


This concept of an iceberg is very much like the fees conversation in the retirement plan world. We are all sick of hearing about it. We are sick of getting bashed in the press. We are sick of looking over our shoulders, waiting for an attorney to file a suit alleging that we have over charged and are on the hook for restitution to the plan. I think these suits and the negative press continue because like the tip of an iceberg, our clients only see what we do in the board room. We don’t take the time to show them the part of the iceberg that is under the water, which in this case is all of the other work that goes into a plan.

Most people outside our industry have no idea what it takes to run a plan. I am sure you have read articles about fees or studies that discuss how over-priced plans are. But no one ever discusses who is doing this work, or what steps are required to run a plan. Most of the articles I can find only talk about the cost of the investment portfolio, probably because that is the only piece of the equation that transfers from their other knowledge base. I’ll take that a step further: even a lot of people in our industry don’t know how much work goes into servicing a qualified plan. Think about other advisors in your office who don’t touch plans. Think about other professionals, like CPAs and attorneys, who ask questions leading you to believe that our craft is as foreign to them as rocket science is to most of us. Think about the last gathering that you attended where your specialty in plans came up and the person listening to you just stood there, mouth agape, when you told him what you do. It happens too often, right?

The reality is that there are a lot of moving pieces that many people, both in and out of the industry, do not understand. And that includes our clients.

Want proof (You knew that was going to come out if you are familiar with us)? Here it is: a client asks you to drop your fee, they most likely do not understand the time that goes into servicing his plan. Think about it for a minute. Most of what we know about someone else’s profession is limited to what we see them do, like the tip of the iceberg. In sports, many spectators do not understand the hours of daily practice professional athletes endure. Many of your clients probably only see the reports you provide at quarterly due diligence meetings and enrollment meetings. They see what you do when you are there with them and nothing more. Out of sight; out of mind.

We owe it to ourselves to show more. We cannot complain about being pressed for fees if we don’t educate our clients about our work. Do your clients know how much time you spend building the reports for the quarterly and annual meetings? Do they know how much time you spend answering phone calls and e-mails from participants? Do they understand the amount of time it takes to find a suitable replacement fund that will meet the standards of the Investment Policy Statement? Do they know how much work can go into ADP/ACP testing? When I sat down to write out all of the different tasks associated with servicing a plan, I was amazed. These are all real activities that take real time and real experience to manage effectively and efficiently. These are activities that you want done by a professional who is properly incented to do a good job. I have often said that I unsubscribed to Groupon because their ads were for things for which I want to pay full price- parachuting, dental work, and appendectomies. Our business should be no different. Retirement is too important to take a cheap approach.

Do our clients know how much of the service iceberg is below the surface? And let’s take that a step further: do you know all of these details? Have you put the effort into tracking the data so that you know how to price a case? Think about it from a business perspective. If you don’t know how much time you are spending on a given project, how do you know where to make your process more efficient? If you don’t know how much time a case takes to service, how do you know how many cases you can adequately service? How do you know when and where to add staff? Or software?

As we see the 408(b)2 disclosures evolve and the media continue to bash us for high fees, let’s start to give them a look at everything below the surface. We owe it to ourselves and our clients. We owe it to our profession.