PLANSPONSOR - June/July 2019 - 50

ERISA EXAMINATION
Recordkeeper
Add-Ons
Fiduciaries could 'pay' for these services
F
ee litigation, 408b-2 disclosures and the Department of
Labor (DOL)'s focus on fees over the past few years have led
to a decrease in recordkeeping fees for plans. That's good
news for plan participants and plan sponsors. But what about
the recordkeepers? They are still for-profit businesses that need
to generate income, and if they are making less on plan recordkeeping
services it's only reasonable to expect them to find a way
to compensate. As recordkeepers develop alternative means to
generate income, plan committees should be aware of what this
means for participants and for their own fiduciary duties.
One obvious income source is the add-on services that may
be provided and charged to individual plan participants. While the
committee has-hopefully-reviewed and negotiated a reasonable
annual recordkeeping fee for participants, sometimes it overlooks
other charges that may apply. For example, often there is a distribution
fee when issuing the participant his distribution check;
Another optional service
offered by recordkeepers and
advisers alike, is a managed
account service.
there are also loan processing and ongoing loan administration
fees and self-directed brokerage account fees. These are generally
charged to the individual participant to whom they relate. Note
there is nothing wrong with a recordkeeper charging these fees
or the plan sponsor passing them on to the participant. However,
they do represent compensation that needs to be considered as
part of the committee's determination that the recordkeeping
agreement and compensation received is reasonable.
When selecting and monitoring the relationship, the
committee should make sure it is benchmarking, and considering,
these additional fees along with the annual fee applied to
all participant accounts.
Another optional service, offered by recordkeepers and
advisers alike, is a managed account service. If a committee
decides to make this service available, the participants can elect to
transfer investment management responsibility for their account
to the service provider, which charges a fee to their account. This
can help participants who want their account actively managed but
50 PLANSPONSOR.com June - July 2019 Art by Joseph Ciardiello
lack investment expertise. While it's up to the participant to decide
whether to purchase the service, the committee is still responsible
for selecting and monitoring the managed account provider and
determining that the fee is reasonable.
Besides providing additional services to the plan itself, recordkeepers
may also generate income by capturing plan rollovers to
individual retirement accounts (IRAs) and cross-selling retail
financial products-e.g., 529 plans-outside of the retirement
plan. Plan participants are prime targets for these income-generating
services. Plan committees should, therefore, think through
and understand whether and how their recordkeeper may be
marketing to their participants. One concern is that participants
may believe the committee has authorized or endorsed the recordkeeper's
outside services when really the committee may not even
be aware the marketing is taking place.
In a recent case, plaintiffs alleged that the plan fiduciaries
breached their duty by allowing the recordkeeper to use participant
information to market other services to them outside of
the plan. Essentially, the plaintiffs alleged that participant data
is a plan asset that should be protected by the plan fiduciaries.
As part of the court-approved settlement, the fiduciaries must
prohibit the recordkeeper from using participants' information
to market or sell products to them unless they have initiated it.
Claims regarding use of participant data in other cases
have generally been unsuccessful, but we expect to see this issue
continue. Given these concerns, we have seen some committees
consider restricting use of participant data for marketing purposes
and/or communicating to participants that the committee does
not endorse or recommend services outside of the plan.
We understand that recordkeepers need to seek other sources
of income, and acknowledge that the added services-whether
inside or outside the plan-may fulfill participant needs. However,
from the committee's standpoint, what's important is understanding
these additional services, determining the reasonableness
of the fees for them and monitoring any services participants
have purchased. The committee should also ascertain whether the
recordkeeper is using participant data and for what purposes, and
decide what, if any, restrictions should be placed on such use.
Summer Conley is a partner in the Los Angeles office of
Drinker Biddle & Reath LLP. Michael Rosenbaum is a partner
in the firm's Chicago office.
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