Surviving and Avoiding DOL Service Provider Investigations

August 2, 2013 ( – There are practices that can trip up retirement plan providers and make them susceptible to Department of Labor (DOL) investigations—however, some negotiating can be done.

During a webcast, Bruce Ashton, a partner in Drinker Biddle & Reath’s Los Angeles office, reminded attendees that the DOL asks for a huge number of documents (see “Tips for Document Requests in Service Provider Investigations”). One thing the agency wants is documents describing agreements between service providers and plan clients; it is looking for a description of certain activities such as giving fiduciary investment advice to the plan, as well as descriptions of fee arrangements, particularly as related to asset management and investment advice.

The DOL also asks for the number of occasions during the number of years covered by the investigation that the service provider gave investment advice to the top 20 clients.

Fred Reish, partner at Drinker Biddle & Reath, and chair of its Employee Retirement Income Security Act (ERISA) Financial Services practice in Los Angeles, reminded attendees that the letter from the DOL notifying a service provider of an investigation may request that documents be provided in an impossibly short time. He suggested negotiating the timing of responding. In addition, service providers may negotiate the volume of materials to be provided. The agency will not negotiate on the information about the top 20 clients, but is reasonable about selecting a sample of all plan clients for other information requests.

Reish also suggested service providers have counsel “pre-audit” the materials to see what they are likely to show.

Service providers may want to ask the DOL to provide a formal subpoena of the information requested. According to Reish, this will protect them from angry clients if the investigation finds something the client is doing wrong. One specific reason service providers may want to get a subpoena, added Ashton, is that many service agreements have a confidentiality clause requiring such a thing before disclosing client information.

Brad Campbell, counsel in Drinker Biddle & Reath’s Washington, D.C., office, and former assistant secretary of Labor for the DOL’s Employee Benefits Security Administration (EBSA), said that when a case is first opened, the EBSA investigation of the company is an internal function. If it finds significant violations, it will turn to the Office of the Solicitor for advice about how to solve the violations, or to determine if litigation is needed.

A 502(l) penalty is a statutory penalty that can be assessed under ERISA against a fiduciary or other parties, based on an applicable recovery amount; it can be up to 20% of the recovery amount. Josh Waldbeser, an associate in Drinker Biddle & Reath’s Chicago office, said it can only be assessed in two situations—by a court or pursuant to a settlement agreement. When negotiating with the DOL, service providers should make sure they offer to resolve violations apart from a settlement agreement. He said companies have an opportunity to avoid a settlement by identifying and self-correcting any violations before or during investigations; the DOL agent cannot claim there is anything on which to settle.

Waldbeser added that agreeing to voluntarily comply is still not settling, and they should make that clear to the DOL. To avoid the line-crossing into a settlement, he suggested companies be cooperative and amicable while still putting forth arguments. Experience is key to presenting arguments the DOL will consider and not view as combative. The agency would rather solve the violations without a settlement agreement.

He said that, even if the investigation reaches the point of a settlement agreement to avoid litigation, the 502(l) penalty can still be avoided or negotiated. He noted that one client got the DOL to agree to let it review the agreement for a month, and the agency agreed anything fixed in that time would offset the penalty assessment. Service providers also have a right to petition to have the penalty reduced or waived on the basis of financial hardship or good faith compliance with ERISA.

Things That Can Trip Up Service Providers

Reish said, in most cases, a recordkeeper is not a fiduciary, but there are situations in which one can be. It is possible the expected fiduciary regulation will point out that, when a recordkeeper gives a list of investments to a plan sponsor—such as when a plan is converting onto its platform or for a startup plan—this is fiduciary investment advice unless certain disclosures are made. Also, recordkeepers that have packages of investments often refresh the package by removing underperforming funds and replacing them with better performing ones. Some of the old funds are being used in plans, so the recordkeeper is affecting plan investments. Reish noted that providers can do that if they follow the DOL’s Aetna advisory opinion, which includes giving plan sponsors reasonable notice—60 days in Aetna’s case. Finally, if a recordkeeper sets its own compensation it can potentially become a fiduciary—for example, keeping float income without making a disclosure of its float policy.

Summer Conley, counsel in Drinker Biddle & Reath’s Los Angeles office and a former DOL investigator, added that if a payroll company receives float as part of processing deferrals, the DOL says that, as long as it discloses its policy rate and time frame and operates in accordance with that policy, this is not a prohibited transaction. However, on the flip side, that float is considered compensation, so a plan fiduciary needs to take it into account when determining if compensation is reasonable.

For registered investment advisers (RIAs), Ashton said that, if the RIA is engaged to provide advice at the plan level on non-brokerage account assets, and it is negotiated to also give advice on a participant level, the RIA may charge a fee for managing participants’ self-directed brokerage accounts (SDBAs). However, if that is not negotiated at the outset and the RIA recommends it manage SDBAs as a service to the plan and participants, recommending an investment manager is a fiduciary function.

Campbell noted that if an RIA offers asset allocation models and charges participants for those in addition to getting a fee for advising the plan, that can be a prohibited transaction. He said RIAs can address this by disclosing in agreements that the fee will cover service to the plan and the availability of model portfolios. He said RIAs can also establish in the agreement that the RIA is a 3(21) fiduciary adviser with respect to those portfolios only and no other.

Waldbeser said a fiduciary adviser will have engaged in prohibited self-dealing if it recommends something that will add to its compensation, such as 12b-1 fees. A plan sponsor cannot approve the arrangement and get the RIA out of the prohibited arrangement.

According to Ashton, if a plan has a number of mutual funds, and some pay 12b-1 fees while some do not, and the RIA is paid via 12b-1 fees, this is a variable compensation situation that leads to prohibited transactions, because the RIA can control compensation by recommending funds that pay compensation or do not. He suggested that the RIA have a set fee with the plan, and then 12b-1 fees will offset what the plan pays; that will level fees.

Finally, Campbell noted that if a nonfiduciary service provider can talk to exiting participants about rollovers and tell them all their options, including individual retirement accounts (IRAs) the service provider offers, it should document the whole conversation, showing it has made the right disclosures. If a fiduciary service provider to the plan or participants recommends the adviser’s IRAs, it raises concerns that the adviser is raising his own fees. Some advisers use mitigating disclosures, but that is not a clear, safe path when giving advice about rollovers. Additional guidance is needed, he said.