Surprise--Your Retirement Plan Participants May Be Hiring Advisors and Using Plan Assets to Pay for Them
Increasingly, I have come across 403(b) plans where the recordkeeper has allowed participants to hire individual advisors and arrange to have participants pay for the advisor’s services out of their retirement plan account balance. That arrangement is attractive from a participant perspective, since they can use pre-tax, rather than after-tax, funds to pay their financial advisors.
However, plan sponsors generally have little-to-zero information about such arrangements. While such arrangements are ostensibly approved at some point, usually when the plan was first established, or when the recordkeeper first made the option available and a participant wished to sign up, they often have not been revisited since the time of establishment. In addition, there are generally no agreements between the plan sponsor and the individual advisors; all agreements are typically between the recordkeepers, advisors and participants.
Though the recordkeepers typically set minimum standards for advisors to qualify to enter into such arrangements with participants, in our policing of such plans we have discovered that such standards are not all that stringent, with advisors permitted to charge as much as 2% or more in fees, and advisors with multiple SEC enforcement actions against them being permitted to participate.
Obviously, this can be an issue from a fiduciary perspective, particularly for ERISA plans. Thus, we would suggest that plan sponsors inquire of their recordkeepers as to whether such arrangements exist. If they do, they should obtain detailed information regarding the program, including fees and minimum qualifications for advisors. In addition, outside retirement plan counsel should be alerted as to the existence of such a program.
Some plan sponsors, after reviewing such arrangements, have chosen to limit the fees that can be charged in the program. Others have chosen to eliminate such arrangements entirely, though that can be disruptive depending on the number of participants utilizing the program. Do you have an issue that you wish for me to address in Top of Mind? Let me know as always on Twitter or at firstname.lastname@example.org.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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