Many business deals are done with a “wink..wink”. These deals can result in prohibited transactions and perhaps criminal charges. In these cases the plan sponsor (employer) stand alone with the liability. Remember plan sponsors must act for the sole benefit of the plan participants and their beneficiaries. The current adminsitration has ramped up the audit teams for retirement plans.

Take, for example, a sales rep which has no service agreement with a plan and who is compensated solely by commissions. Let us say this rep gets word that a 401(k) client is considering moving its business to a different vendor (and a different sales rep). The rep approaches the clients and offers to pick the TPA fees of the plan if the plan continues to purchase the investment productsthrough him.  It is clear that this kind of arrangement can be sound when it is made properly part of a negotiated service agreement with a plan vendor.  But with a sales rep without a service agreement- a problem?Another example could be “tying” arrangements, where a bank has a client’s 401(k) plan as well as holding a corporate loan with the plan sponsor.  The plan sponsor notifies the bank that it is moving its 401(k) to another institution. The bank responds by threatening to call the loan, or not to extend any future credit if the 401(k) plan is moved- a problem?

This is a criminal statute. Unlike the “civil law” ERISA prohibited transaction rules where “intent” doesn’t matter,  “scienter” (that is, intent) is still a critical element.  But still the word is caution.  Compliant compensation schemes are difficult enough to design, given the prohibited transaction rules and the forthcoming 408(b)(2) regs. But don’t forget about the non-ERISA criminal rules when addressing these issues.

Many plan sponsors are unaware of the prohibited transactions they are committing when dealing with plan providers. All it takes is one employee complaining to the Department of Labor and the plan sponsor will be liable.

Please comment or call to discuss how this affects you and your company.