DOL Investigations of Service Providers

November 2, 2012 ( – The Department of Labor does not only investigate retirement plans, it also investigates service providers.

During a workshop at the American Society of Pension Professionals & Actuaries (ASPPA) Annual Conference, Jeffrey A. Monhart, chief, Division of Field Operations, Office of Enforcement at the Employee Benefits Security Administration (EBSA), said entities subject to investigation include registered investment advisers (RIAs), investment advisers, investment managers, consultants and broker/dealers. “Service providers are always a party-in-interest, but they are not always fiduciaries,” Monhart explained, adding that the agency will determine fiduciary status of service providers based on facts and circumstances established through interview and records review.  

Information used to determine fiduciary status of a service provider includes the organizational chart, the products and services sold, affiliate relationships and compensation received through affiliates, as well as interviews with employees, affiliate employees and clients. The DOL determines the entities it will investigate through many sources, including retirement plan participant complaints, Form 5500 filings, media reports, other regulators’ actions and Securities and Exchange Commission (SEC) investigations.  

Monhart said the DOL is attuned to situations where the provider is both managing and valuing investments; there could be a conflict-of-interest if compensation is tied to assets under management. The agency also looks for misrepresentations about portfolio holdings, for example, stable value funds that include holdings in risky investments.

In addition, investigators look at what is done with “float” compensation, whether it is retained as additional compensation or rebated to plans and whether the service provider discloses to plan sponsors what it does with the “float.” Service providers may hold plan assets in their own bank accounts while waiting for investment directions from participants; and/or distribution checks to be cashed. The short-term earnings generated in their bank accounts are generally referred to as “float.”  

“Making a profit is not a problem, the question is, is there a fiduciary using its authority, directly or through an affiliate, to increase its profits?” Monhart noted.  

Monhart mentioned as examples of service provider investigations the recent investigation of USI Advisors which found the investment adviser did not fully disclose the receipt of 12b-1 fees to clients (see “USI Advisors Settles DOL Suit Over Fees”) and the investigation of Morgan Keegan which found the broker recommended certain hedge funds to plans and in return received revenue-sharing and other fees (see “Morgan Keegan Ordered to Pay 10 Pension Plans”). He added that it is uncommon that the DOL sues a service provider; the agency will work closely with an entity to get it in compliance.