DoL: Fiduciaries Have to Offset Fund Company Payments

May 24, 2005 ( - Banks, brokerage firms and investment firms cannot accept payments from mutual fund companies in exchange for steering retirement account customers into those funds without cutting other payments by the same amount.

>That was the holding in  an advisory opinion from the US Department of Labor (DoL) issued to a Bloomington, Illinois thrift.

>The DoL said Country Trust Bank had asked for the opinion to make sure that one of its managed account programs for IRAs did not violate the Employee Retirement Income Security Act (ERISA) in how it handled receipt of fees. The DoL opinion involved a retirement account that allocates assets to different types of securities based on customers’ risk profiles and market performance. Country Trust charges 1.25% to 1.75% of assets under management for allocation services..

According to the advisory letter, Country Trust got three types of fees: investment advisory fees from its affiliated mutual funds, non-advisory fees from the funds, and a management fee paid by each IRA. At issue, according to the opinion, was whether the receipt by Country Trust or an affiliate of fees from the affiliated mutual funds resulting from services provided by the bank to the IRAs would be considered a prohibited transaction.

>Louis Campagna, chief of the DoL’s Division of Fiduciary Interpretations in the Office of Regulations and Interpretations, wrote in the advisory opinion that a fiduciary like Country Trust may not prompt a retirement plan to engage in a transaction that will generate “consideration from a third party in connection with such transaction” without simultaneously cutting other fees by the amount received from the third party.

>Financial institutions receive fees for providing administrative and other services to participants in individual retirement accounts and 401(k) plans as well as payments from investment companies whose funds are included in the menus of retirement plans that brokerage firms or banks offer their clients. The payments are often in the form of 12b-1 fees.

Violation Warning

>However, violations could still occur, the DoL official warned. “[I]f the provision of services by the bank to an IRA under the (managed IRA program) results, in operation, in a divergence of interests between the bank and the IRA, or an incorrect offset of service-related fees, then violations of Section 4975(c)(1)(E) and (F) of the (Internal Revenue Service) Code (relating to prohibited transactions) could occur,” Campagna said.  

>While the opinion to Country Trust related to an account with an asset allocation element, it also reiterated a stance taken by the Labor Department in 1997. The department said then that fiduciaries offering 401(k)’s and IRAs could not accept 12b-1 fees from funds they offered to clients without offsetting those charges. The advisory letter also said Country Trust planned to expand the managed account program from IRAs to K plans.

>The Labor Department has said that it is ramping up its investigation of fiduciaries trying to determine whether plan participants have lost money as a result of conflicts of interest. If a fiduciary breaches its duty to plan participants by accepting fees from a third party, for example, the department could demand restitution and participants can sue to recover their losses.