ERISA PLAN ADVISOR

The Duty to Disclose and Uncover Conflicts of Interest

ERISA plan service providers have a duty to disclose conflicts of interest as well as potential conflicts of interest to plan sponsors in a manner that the plan sponsor clearly understands. Of equal weight and arguably greater significance is the duty of the plan fiduciaries to uncover all conflicts and potential conflicts of interest with third party service providers. Additionally the plan sponsor must understand that any failure by third party service providers to disclose conflicts does not excuse the plan sponsor from their fiduciary duty to conduct their due diligence. Any failure by the plan sponsor to adequately investigate the existence of potential conflicts may have significant adverse consequences.

Selecting and Monitoring Pension Consultants – Tips for Plan Fiduciaries, is a U.S. Department of Labor EBSA publication from May 2005. An excerpt of text from this document reads … “Findings included in a report by the staff of the U.S. Securities and Exchange Commission released in May 2005, however, raise serious questions concerning whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice they are providing to their pension plan clients.” [Emphasis added.]

I’m not suggesting a wide spread conspiracy that ERISA Plan advisors and third party service providers are intentionally covering up conflicts of interest across the entire spectrum. What I am suggesting is that employers and plan sponsor committee members need to give more than lip service to this important issue. If for example, your ERISA Plan advisor has an annual sales conference and your plan advisor receives sponsorship dollars for that conference from a nationally known 401(k) recordkeeper or marquis name fund manager … is this is a conflict? Probably not a direct conflict, but most likely a potential conflict and one that should be disclosed. I’m not suggesting that there is anything wrong with this type of sponsorship as FINRA and SEC provide very specific compliance guidance on how these things should be handled. But if the same advisory firm suggest somehow they are 100% independent and free from any conflicts without disclosing this potential conflict then perhaps circumstances and full disclosure have run afoul. Another excerpt from the DOL publication, “The SEC examination staff concluded in its report that the business alliances among pension consultants and money managers can give rise to serious potential conflicts of interest under the Advisers Act that need to be monitored and disclosed to plan fiduciaries.”

The DOL publication is in my opinion a good starting point for plan sponsor fiduciaries to explore conflicts and potential conflicts with third party service providers. The plan sponsor however, needs to dig a little deeper than just the questions provided by the DOL. Additional guidance can be found in a February 2009 White Paper authored by Fred Reish and Joseph Faucher, titled “The Fiduciary Duty to Avoid Conflicts of Interest in Selecting Plan Service Providers” . It is an excellent compliment to the DOL guidance. Reish and Faucher provide an excellent summary of fiduciary fundamental duties, what situations give rise to conflicts and what fiduciaries should do about it. If you are a plan sponsor, looking to search for an advisor or other third party service provider, a quick study of this white paper will serve you well. If you are an ERISA Plan advisor and want to stand out from your competitors, you may want to consider offering this reference to your client or potential client as a resource to help them with their decision process.

Dig deep!

In referencing publications from 2005 and 2009, clearly, this is not “breaking news.” But it still needs greater attention in the ERISA Plan space. Be sure to dig deep enough to uncover what may be buried beneath the surface