Brian Haynes Posted February 22, 2011 Posted February 22, 2011 I have a client, a potential corporate trustee of a number of 401(k) plans, who has been asked by the current third party administrator (TPA) for these plans, to make an offer as to a referral fee it will pay to the TPA if the TPA recommends to the sponsoring employers that my client act as corporate trustee (as a replacement of the current corporate trustee who is winding down its business). I wonder whether any such referral fee for existing plans, or for any new plan accounts in the future, is permissible under ERISA. I would think the TPA and my cleint would need to clearly disclose the payment of a referral fee to the employer sponsors. I am not sure whether any disclosure is required to participants since the referral fee would be paid from the general assets of the corporate trustee. If the TPA was my client I think I would be concerned that it would be breaching a possible ERISA fiduciary duty by recommendiing the new corporate trustee be the entity that pays the TPA the highest referral fee. Would this be a prohibited transaction? What additonal advice should I give my client? Thanks for your help.
austin3515 Posted February 22, 2011 Posted February 22, 2011 Seems cookie cutter PT to me... Austin Powers, CPA, QPA, ERPA
Lou S. Posted February 23, 2011 Posted February 23, 2011 On its face I agee with Austin, seems like a staright forward PT. So unless there is PT exemption the Trustee can point out that allows them to do this I'd stay away. If it is covered by a PT exemption then sure you can do it but again, make sure you have your disclosures in order to the client and let them know of the potential conflict of interest.
Guest Sieve Posted February 23, 2011 Posted February 23, 2011 I thought so, too, at first glance. But, is the TPA a disqualified person? If not, where's the PT?
austin3515 Posted February 23, 2011 Posted February 23, 2011 Service Providers are DP's. Austin Powers, CPA, QPA, ERPA
Guest Sieve Posted February 23, 2011 Posted February 23, 2011 If they provide service to the plan. Doesn't the TPA provide services to the administrator (employer)?
austin3515 Posted February 23, 2011 Posted February 23, 2011 I wouldn't try that defense in court Austin Powers, CPA, QPA, ERPA
Guest Sieve Posted February 23, 2011 Posted February 23, 2011 Well, I assume the TPA is not a fiduciary (all I have to do is ask one of them to find out). So, there's no violation of the self-dealing prohibitiion or the use of plan assets prohibition (IRC 4975©(1)(E) & (F)). So, where would this fit? IRC 4975©(1)(D)?
Brian Haynes Posted February 23, 2011 Author Posted February 23, 2011 I think that if the TPA is a fiduciary, the payment of the referral fee would be prohibited under Section 406(b) of ERISA. If not, then it is less clear. If the Plan hires the corporate trustee with no principal motivation for the payment of the finders fee, it seems like there is no PT. I think it comes down to whether the TPA is considered a fiduciary, which is not always clear.
austin3515 Posted February 23, 2011 Posted February 23, 2011 I'm a little lesss sure of my orignal answer, but I'm going to go with "use of plan assets by a disqualified person." The TPA will be getting a benefit as a direct result of those plan assets. The fact that it is indirect would not give me much comfort. Austin Powers, CPA, QPA, ERPA
Guest Sieve Posted February 23, 2011 Posted February 23, 2011 I think you're probably right, austin. But, in my mind, this fits better in (F) than in (D)--since (F) is the indirect transaction you mention, while (D) seems to require a level of control by the DP ("use by or for the benefit of"). Still, I doubt that (F) applies. Certainly doesn't pass the smell test.
austin3515 Posted February 23, 2011 Posted February 23, 2011 I guess the opther avenue is that it might violate the "reasonable compensation" exemption for service providers. What is the service for which you are obtaining this wind-fall? I'm sorry, did you say "nothing"? Perhaps that is not reasonable! Maybe that's what one of your cites was referring to, but I didn't feel like looking it up Austin Powers, CPA, QPA, ERPA
austin3515 Posted February 23, 2011 Posted February 23, 2011 http://benefitslink.com/boards/index.php?showtopic=47988 It dawned on me that the question I posted yesterday is strikingly similar. The only difference is that in my case, we never asked for it. The fund company said they were giving it to us (they actually just sentt he check). Also, the compensation is so ridiculously small, you would think it satisfies the reasonable comp test almost by default. Anyway, thought I'd make the connection for everyone. Austin Powers, CPA, QPA, ERPA
Kevin C Posted February 23, 2011 Posted February 23, 2011 This discussion reminded me of an article I read recently. Fiduciary Status for Referrals http://www.reish.com/publications/article_...m?ARTICLEID=996
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