Integrating ERISA Into Your
Compliance Systems
Marcia Wagner
Managing Director
The Wagner Law Group
Paul J. Tolley
Chief Compliance Officer
Commonwealth Financial Network®
Leo Karwejna
Managing Director, Chief Compliance Officer
Public Financial Management, Inc.
Agenda
1. Know the Applicable Rules (ERISA)
2. Basic Roles of Providers
3. Types of Advisors
4. Types of Compensation
5. Firm Infrastructure to Support Business
6. ERISA Policies, Procedures and Controls
7. Does ERISA Apply to Your Firm?
2
Fiduciary Responsibilities

Employee Retirement Income Security Act of
1974, as amended (ERISA)
◦ Plan fiduciaries have a “great responsibility.”
◦ Personal liability for fiduciary breaches.
◦ Penalties can also apply to non-fiduciary parties.
3
Overview of Fiduciary Rules

ERISA plan must have at least one fiduciary.

Plans may also have multiple fiduciaries.
◦ Responsibility and potential liability for co-fiduciary’s
actions.

Person is not a fiduciary if only performing
ministerial functions.
4
Who Is a Fiduciary?

Named Fiduciary
◦ Fiduciary named in plan document with principal
responsibility over plan.
◦ Typically, the plan sponsor.

Functional Fiduciary
◦ Person with discretionary authority over plan
management;
◦ Person with authority over disposition of plan assets;
◦ Advisor who provides investment advice for a fee; or
◦ Person with discretionary authority over plan
administration.
5
Fiduciary Standards
Fiduciary standard of care under ERISA.
 Must act solely in interest of plan participants.

◦ Exclusive purpose of providing benefits to plan
participants.
◦ Carrying out duties prudently.
◦ Following terms of plan document unless inconsistent
with ERISA.
◦ Diversifying plan investments.
◦ Paying only reasonable expenses of plan.
6
Focusing on Specific Duties

Carry out duties prudently
◦ Must manage plan assets with care, skill, prudenCE
and diligence…
◦ …that a prudent person acting in a similar situation…
◦ …and familiar with such matters would exercise.
◦ Duty of prudence focuses on process.

Paying only reasonable plan expenses
◦ Must ensure fees paid to plan’s providers are
reasonable.
◦ ERISA 408(b)(2) regulations will require providers to
deliver fee disclosures to plan sponsors (Jul. 1, 2012).
7
Prohibited Transactions

ERISA Section 406(a) prohibits transactions
between plan and any Party in Interest.
◦ Party in Interest includes plan sponsor and providers.
◦ Net Result: Exemption needed for even routine plan
transactions.

ERISA Section 406(b) prohibits self-dealing by
any plan fiduciary.
◦ Mere disclosure will never cure a PT.
8
Fiduciary Liabilities and Penalties

ERISA allows civil actions to be brought
against any fiduciary in breach of duties.
◦ Fiduciary is personally liable for plan losses caused by
breach.
◦ Other equitable relief may be awarded by court.

DOL Penalty
◦ Civil penalty equal to 20% of amount recovered by
DOL on behalf of plan.
◦ DOL may waive civil penalty in its discretion.

Additional penalties for prohibited
transactions, including IRS excise taxes.
9
Co-Fiduciary Liability

ERISA Section 405(a) imposes potential
liability on a co-fiduciary:
◦ If he participates knowingly in the other fiduciary’s
breach;
◦ If his failure enables the other fiduciary’s breach; or
◦ If he knows of the other fiduciary’s breach and does
not make reasonable efforts to remedy the breach.
10
ERISA Bonding Requirement

ERISA Section 412 requires bonding for
fiduciaries who “handle” plan funds.
◦ Bond must protect plan against loss due to fraud or
dishonesty.
◦ Non-discretionary advisor not subject to ERISA bond
requirement.

Amount of ERISA Bond
◦ 10% of plan assets (Minimum of $1,000).
◦ Maximum of $500,000 ($M for plan holding employer
securities).

Broker-Dealer exempt from ERISA if meets
SRO’s fidelity bond requirement.
11
Agenda
1. Know the Applicable Rules (ERISA)
2. Basic Roles of Providers
3. Types of Advisors
4. Types of Compensation
5. Firm Infrastructure to Support Business
6. ERISA Policies, Procedures and Controls
7. Does ERISA Apply to Your Firm?
12
Basic Roles – Role of Platforms

Three Key Players

Role of Recordkeeping Platforms
◦ Provide recordkeeping services and also serve as
platform for investments.
◦ May include:
- Fund Platforms
- Insurance Platforms
- Third Party Recordkeeping Platforms
- Payroll Platforms
◦ May rely on 401(k) trading / settlement platforms
13
Third Party Administrators

Role of Third Party Administrators (TPAs)
◦ Provide administrative services
(e.g., plan document, IRS testing, compliance).
◦ Work closely with recordkeeping platforms.
◦ TPAs should not be confused with recordkeepers.
◦ TPA services may be “bundled” with recordkeeping
services.
14
Advisors

Role of Advisors
◦
◦
◦
◦
Provide investment services to plan sponsor.
Assist in selection of recordkeeping platform.
Provide other consulting services.
May assist participants through model portfolios,
education or advice.
15
Agenda
1. Know the Applicable Rules (ERISA)
2. Basic Roles of Providers
3. Types of Advisors
4. Types of Compensation
5. Firm Infrastructure to Support Business
6. ERISA Policies, Procedures and Controls
7. Does ERISA Apply to Your Firm?
16
Definition of
“Investment Advice” Fiduciary
 Person provides “investment advice” if has
discretionary control or provides:
◦
◦
◦
◦
◦

Advice on value or advisability of investments…
…is provided to plan on regular basis…
…under mutual understanding that advice will be…
…primary basis for investment decisions…
…and based on particular needs of plan.
Investment “education” is not fiduciary advice.
17
Non-Fiduciary Advisors

Brokers typically do not want to be plan
fiduciaries.
◦ But is broker-dealer providing investment advice?
◦ If so, firm is a functional fiduciary.
◦ Ellis v. Rycenga Homes, Inc. (2007)

Producing TPAs may be closely tied to nonfiduciary advisors.
18
Types of Fiduciary Advisors

3(21) Fiduciary
◦ Provides non-discretionary advice.

3(38) Fiduciary
◦ Qualifies as “Investment Manager” with discretion
over assets.
◦ Must also be a RIA, bank or insurance co.
◦ Must acknowledge fiduciary status in writing.
◦ Sponsor responsible for appointment, but not acts of
3(38) fiduciary.
19
Agenda
1. Know the Applicable Rules (ERISA)
2. Basic Roles of Providers
3. Types of Advisors
4. Types of Compensation
5. Firm Infrastructure to Support Business
6. ERISA Policies, Procedures and Controls
7. Does ERISA Apply to Your Firm?
20
Compensation for Recordkeeping
Platforms and TPAs

Platform compensation
◦ “Direct” compensation includes invoiced fees.
◦ “Indirect” compensation includes product-based
compensation.

TPA compensation
◦ Typically direct compensation, but may include
indirect compensation.
21
Compensation Payable to Advisors

Non-fiduciary Broker-Dealers
◦ Receive indirect compensation only.
◦ Mutual funds pay 12b-1 fees and revenue sharing.
◦ Group annuities pay commissions and revenue
sharing.

RIAs and Dual Registrants
◦ Direct compensation is typically asset-based fee.
◦ May be offset for any indirect compensation received.
22
ERISA Restrictions on
Variable Compensation
 Fiduciary advisor may not engage in selfdealing.
◦ Variable compensation created incentive to steer
clients.
◦ Mere existence of variable compensation triggers
violation.
◦ Group annuities pay commissions and revenue
sharing.

Non-fiduciary Broker-Dealers
◦ Must ensure no “investment advice” is provided.
◦ RIA receiving level compensation may provide
fiduciary advice.
23
408(b)(2) Regulations

Final 408(b)(2) rules become effective, July 1,
2012.
◦ Covers platforms, TPAs, advisors and others.
◦ If applicable, must state services are fiduciary in
nature.
◦ Must describe services.
◦ Must disclose amount/formula of direct and indirect
compensation.

Advisors should confirm fee arrangements
comply with ERISA
24
Agenda
1. Know the Applicable Rules (ERISA)
2. Basic Roles of Providers
3. Types of Advisors
4. Types of Compensation
5. Firm Infrastructure to Support Business
6. ERISA Policies, Procedures and Controls
7. Does ERISA Apply to Your Firm?
25
Firm Infrastructure to Support Business

Interaction of Firm Functions
◦ Compliance
◦ Product Development
◦ Operations

Putting appropriate checks and balances in place

Does independent monitoring occur?

Policies and procedures relevant to activity

Escalation
26
Firm Infrastructure to Support Business
Support for Retirement Business (Advisors)
◦
◦
◦
◦
◦
Template IPS and RFP Proposal Tools
Investment Analytic Tools
Access to In-House Retirement Plan Experts
Develop Turnkey Marketing Materials
Ongoing Training and Education
27
Agenda
1. Know the Applicable Rules (ERISA)
2. Basic Roles of Providers
3. Types of Advisors
4. Types of Compensation
5. Firm Infrastructure to Support Business
6. ERISA Policies, Procedures and Controls
7. Does ERISA Apply to Your Firm?
28
Identification of Retirement Accounts

Retirement Accounts
◦ Leverage Your Record Keeping Partners and
408(b)(2) Service Providers

Processes and Systems
◦ New Account Processes
◦ Changes or Amendments
29
Qualifications for FAs
Offering Fiduciary Advice
 Consider policy on whether financial advisors
(FAs) can offer fiduciary advice.
◦ Consider qualifications for Fas who may serve as plan
fiduciaries.

ERISA prohibitions against variable
compensation.
◦ Requires plan client to be charged level fee.
◦ FA must be IAR of corporate RIA.
◦ Must meet requirements to act as IAR (Series 65 or
7/66).
30
Suggested Criteria for FAs
Offering Fiduciary Advice
 Minimum for number of plan clients and plan
client assets.
◦ FAs with only 1 or 2 plans should not serve as plan
fiduciaries.

Professional Designations
◦ Chartered Retirement Plans Specialist (CRPS)
◦ Accredited Investment Fiduciary (AIF)
◦ PLANSPONSOR Retirement Professional (PRP)

Completion of Internal Education and Training
31
Other Considerations for
ERISA Policies and Internal Controls
 Fee Leveling
◦ must be based on generally accepted investment theories
that take into account, at a minimum, the historic risks and
returns of different asset classes over defined periods of
time;
◦ must take into account investment management and
other fees and expenses attendant to the recommended
investments;
◦ must take into account, at a minimum, information
furnished by a plan, participant or beneficiary relating to
age, time horizons (e.g., life expectancy, retirement age),
risk tolerance, current investments in designated
investment options, other assets or sources of income and
investment preferences;
32
Other Considerations for
ERISA Policies and Internal Controls
 Fee Leveling (continued)
◦ The fiduciary adviser providing investment advice cannot
receive from any party (including an affiliate of the
fiduciary advisor), directly or indirectly, any fees (including
any commission or other compensation) that vary
depending on the investment option selected by a
participant or beneficiary; and
◦ No employee, agent or registered representative providing
investment advice on behalf of the fiduciary adviser can
receive from any party (including an affiliate of the
fiduciary adviser), directly or indirectly, any compensation
(including salary, bonuses, awards, promotions,
commissions or other things of value) that varies
depending on the investment option selected by a
participant or beneficiary.
33
Other Considerations for
ERISA Policies and Internal Controls
 New Account Inception
◦ 408(b)(2) Fee Disclosures

Education and Training
◦ Structured Program that Matches Your Model
◦ ERISA Plan Fiduciary Training
◦ Variable Compensation: Prohibited Transactions
◦ Vary Training by Function
34
Agenda
1. Know the Applicable Rules (ERISA)
2. Basic Roles of Providers
3. Types of Advisors
4. Types of Compensation
5. Firm Infrastructure to Support Business
6. ERISA Policies, Procedures and Controls
7. Does ERISA Apply to Your Firm?
35
Does ERISA Apply to Your Firm?
You Might Be Surprised!

401(k) Plans Maintained At Platforms

Brokerage Account Plans
◦ IRA / Keogh Plan Accounts
◦ Small Profit-Sharing Plans
◦ Defined Benefit Plans
36
Integrating ERISA Into Your
Compliance Systems
Marcia Wagner
Managing Director
The Wagner Law Group
Paul J. Tolley
Chief Compliance Officer
Commonwealth Financial Network®
Leo Karwejna
Managing Director, Chief Compliance Officer
Public Financial Management, Inc.
A0071798