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Collective investment scheme

Are You Committing a Prohibited Transaction?

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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.

via businessofbenefits.com

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.

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How Is Your Financial Adviser Paid?

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Why should you care how your adviser is paid? Because his/her compensation can impact the choice of the products recommended to you and your return from those products. Moreover, the adviser’s compensation structure can create a conflict of interest between what is best for you the client and what is best for the adviser’s wallet.

While there are many fine financial advisers who receive all or part of their compensation from the sale of financial products, a client can never be fully sure that the adviser’s recommendations are fully made with the client’s best interests at heart. Will the adviser suggest a mutual fund that does not pay a commission even if that fund is the best one for the client?

Fee-only advisers do not have this conflict of interest because they are paid by the client, not the financial product provider. They are free to suggest the best investment vehicles and financial products for each client’s individual situation. Full disclosure: I am a fee-only adviser, and I absolutely feel this is the best compensation method for clients.

When selecting a financial adviser, be sure to understand how he or she will be paid from working with you. Compensation structure should clearly not be the only metric used when choosing an adviser. There are many questions to ask a perspective adviser. Most of all, be sure that the person that you choose to work with is competent and that he or she fully understands your situation, your goals, and your expectations from the relationship.

via news.yahoo.com

Conflicts of interest when dealing with a financial adviser can be minimized. Fees and risk level are two thing an investor can control. Working with a fee only adviser can help control both.

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

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The Free 401(k) and the Prohibited Transaction

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Regulation 408(b)2 regarding fee disclosure will end the free 401(k) for plan sponsors. Employees will be informed of what fees thet are paying and to whom. What questions will they ask when they realize their employer is paying anything for this benefit?

For many plans it is very common for the adviser to work one-on-one with participants and provide advice recommendations.  Let’s say that the adviser recommended an actively managed fund that pays revenue sharing, over an S&P 500 Index fund that does not.  While we all know there may be very valid reasons to do so, but ERISA is very clear that fiduciaries must act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.

By recommending a fund that pays revenue sharing over a fund that does not, that adviser (acting in a fiduciary capacity) has just influenced their own compensation, or their firms, thus creating a prohibited transaction.  Therefore, what started out as a qualified financial professional providing assistance to a plan participant, ended up in creating a prohibited transaction for the plan.

In my experience, most plan sponsors do not realize the risk they are putting themselves and their plan in by entering into such arrangements.   This is where you can help them understand the inner-workings of the plan services and fee arrangements to help them from inadvertently creating a prohibited transaction.

via smart401k.com

Many plan sponsors are unexpectedly allowing the adviser to their plan to commit a prohibited transaction. This can and should be avoided, not only to protect the plan sponsor but also to protect the participant.

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

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