Conflict of Interest OR Exclusive Benefit Rule Violation?

[Guest RIA]

I came across two cases this week that I thought were disturbing in that the plan sponsor used the 401k (to its detriment) to increase the profitability or marketing or the plan sponsor itself.

the plan sponsor negotiated with a bank for its commercial lending and/banking needs. Within a period of time, the plan sponsor was solicited by the ERISA services department of the bank and the plan sponsor promptly moved the plan to the bank's 401k offerring (ironically the plan was already serviced by a competing bank). Obviously, there were many 401k vendors that could have offerred superior services and fee schedules. We performed a benchmarking for the client that clearly showed the Bank would be wildly over compensated if the client went ahead with the conversion (soft money and explicit fees totalled over $1500 per head and growing). The bank was using loaded A shares, R shares, etc, when "I" shares were clearly available at a steep reduction in cost. Our report was ignored and the client is proceeding. Is the pan sponsor self dealing? Is this a violation of the exclusive benefit rule or some other provision of ERISA?

[david rigby]

"Prudent man" rule?

[MoJo]

No doubt there is at least a fiduciary issue in ignoring the raping the participants will be taking from a fee perspective, and, to the extent the sponsor believes it is getting something of value in return for placing the plan with the bank (which to me, anyway, seems obvious) I would argue it clearly is an Exclusive Benefits issue. Some employers just don't listen. I expect we'll be reading about this sponsor in a DOL release someday.

[Guest Pensions in Paradise]

If you truly believe the plan sponsor has breached it's fiduciary duties, then you may want to consider notifying the DOL.

[TLGeer]

This is a routine thing for banks. From the sounds of it, the plan was solicited and switched over after the loan was made, which creates a problem proving that there was a quid pro quo arrangement.

However, the fiduciary duty rules do not require a quid pro quo. Essentially, they are process oriented. The basic issues her would be (1) whether or not the fees were fully disclosed and their impact evaluated, and (2) whether the decision process legitimately concluded that other, plan-related factors outweighed the higher fees.

It sounds like you looked at all the proposals. Is that true? If so, it is highly unusual for the sponsor to ignore the recommendations of their consultant. The sponsor might pick one of the top two or three, but I've never seen a sponsor pick the dog.

You don't have standing, so you'd have to drum up a participant or contact the DOL. Once you have done that, lots fewer sponsors will want to hire you to do a proposal review. And this sponsor would probably call their lawyers to see about suing you.

Tom Geer