Giving the financial advisor a "heads-up" - OK or not OK?

[Santo Gold]

Ours is a TPA firm, no product, so we work with a lot of different financial advisors, many of whom bring admin business to us. When an employee terminates employement or retires (particularly those with larger balances or benefits), we normally let the financial advisor know ASAP so that she can get a jump on talking to the employee about rolling the money or providing other advice on how to handle their money. Is there anything wrong with this, technically or ethically? Normally the advisor would know about it anyways when it comes time to move money to pay the person out so I don't really see a problem here, but wanted to check to see what others think.

[Guest fore01k]

Here are some thoughts-

1) Does your firm have a privacy policy that would prevent the release of individual information to outside parties?

2) If it does, is there an exemption that would allow you to notify the broker? My caompany has some affiliated comapnies that offer other services and we state in our policy that we can share information with them unless the client instructs us not to.

3) Is your firm receiving anything in return for these "heads-ups"?

Personally, I don't see a problem with telling the advisor as long as the company receives no benefit from the notifications. But who's to say what a benefit is? (Do the brokers continue to give you business because you give the knowledge of the terminations?)

In the times we are now with SOX and other privacy laws being promulgated left and right, I fear that the 1 out of 1,000 people you tell the broker about might have a fit and try to "do" something.

Do they have a leg to stand on? Who knows?

[JanetM]

I don't see how this is any different from what the Vanguards and Fidelities do now. When someone takes distribution from plan they record keep they send their IRA rollover kit with distribution paperwork.

As long as you don't get kick-back and you tell the plan sponsor I don't see you have an issue.

[Guest qualified plan]

You might want to check the service agreement that you (presumably) sign with the plan sponsors. The agreement might impose confidentiality provisions on you, the TPA, that would prevent this communication. If the agreement includes such a restriction, and you provide the referral anyway, you would be in technical breach of the service agreement, and that breach might have consequences.

(In case you can't tell, I am a bit more suspicious about this activity than the previous posters, and would generally advise against it.)

[jaemmons]

Why would this pose any problems with confidentiality? It sounds like the FA is currently servicing the plan anyway, so how would this communication be a problem?

[Effen]

There may not be anything legally wrong with it, but I think it is very unprofessional. If I was the plan sponsor, I would tell you to stop, simply out of privacy concerns. Do you also tip off funeral directors when someone dies? How about head hunters when someone terminates?

As a consultant I recommend to the plan sponsors that they be very careful about recommending anyone to a participant for personal investing. The last thing you want is for a participant to sue you because the person you recommended lost all their money. Generally I tell them to stay out of the discussion.

I once had a client who told participants who took lump sum to contact a "family friend" once they had their check. The "family friend" would then sell them an annuity for LESS than the amount the participant just rejected when it took the lump sum. The plan took a loss when it paid the lump sum, participant ended up with less when he bought the annuity and the "friend" made a nice profit, but "everyone was ok with it".

The "Vanguards and Fidelities" are keeping it in house. They aren't tipping off an outside vendor. I think that is very different and a little slimy.

[jaemmons]

Effen,

I agree that if the FA is an unrelated party to the plan, that there is a clear violation of confideniality. However, I think in this situation, the FA is already servicing the plan, so to communicate with them regarding assistance with participant distributions does not pose any problem. Also, why would it be unprofessional?

[Effen]

I feel it is unprofessional because you are sharing personal information about a participant with an outside party without the participant’s knowledge or consent. How would you feel if you took a home equity loan from your bank and then immediately started getting phone calls from builders that your banker tipped off?

If it were an individual account plan w/ individual investment direction, the FA would know the person took a lump sum because they can see the money was paid. No tip off necessary. If it's a pooled DC plan or a DB plan, the FA works for the Plan as a whole and not the individuals.

If I were the participant, I would be very upset with the employer for leaking my decision. If I were the employer, I would most likely fire the TPA for leaking it.

[QDROphile]

Effen is making sense, but I will up the ante and confirm that it IS legally wrong. A plan fiduciary is obligated to keep participant personal information confidential. The TPA is an agent of the fiduciary (or perhaps is a fiduciary itself, despite its claims to the contrary). As the agent of the fiduciary, the TPA is bound by the same restrictions; it has no separate right or authority to breach confidences, especially not to further its own interests.

It may be possible wiithin the scheme of administratration for the fiduciary to arrange for an eligible participant to be provided with certain information about options for disposition of distributions from the plan, but a TPA has no business acting except in strict conformance with the directions from the fiduciary. And the fiduciary had better know exactly what is going on under its authority.

[E as in ERISA]

Does the sponsor or fiduciary know that you are doing this and approves it?

When a service provider provides another form of product/service to the plan, there is a potential conflict of interest that could result in a prohibited transaction. There are a variety of specific exemptions that allow the product/service to be used (use of a service provider's proprietary investments, for example). Many times the exemption rests on the fact that the plan sponsor or fiduciary is the party actually selecting and approving the other product or service. That is expected to remove the conflict of interest in many cases. That may be how others get around it. That is how the selection of the plan's service provider for automatic rollover IRAs is not a prohibited transaction -- the plan fiduciary has to approve the IRA vendor. However, if the proposed IRA vendor is also the investment advisor to the plan, then it may not be exempt.

To the extent that you could be perceived as being involved in the promotion/marketing of the financial advisors' services/IRA products and are possibly getting indirectly compensated for it (by getting business directed your way), you might want to make sure you're not creating risk of prohibited transaction for your plans.

[Santo Gold]

Thanks to all for giving me a lot to think about.

The plan sponsor does not explicitly know that I am talking to the FA right after I hear about the employees termination. However, this particular plan is self-directed (albeit in pooled, not individual accounts), so the sponsor is aware that the FA will have a role in getting the individual paid out.

Our firm gets $0 from the FA whether the EE keeps the money with the FA or not. Full disclosure however might yield indirect benefits though; The "goodwill" that is generated by informing the FA early might be manifested in continued new business being brought our way. I scratch your back, you scratch mine......... But is this really illegal/unethical or just good business? There is nothing "automatic" about the FA getting this as a rollover and in this specific case, the EE has already met and spoken to the FA. EE can always say no to the FA.

Years ago I worked for a TPA and they took it 1 step further; as part of their distribution forms, they had the option to keep the money in the same plan investments, just renamed as an IRA, and named the FA whom to contact. That seems a little more strong-armed than this.