Prohibited transaction? A competitor for providing bundled DC Plan ser

[Guest BNYMTC]

A competitor for providing bundled DC Plan services recently approached a client with the offer of free ancillary services for senior executives. Basically they told the client that if they moved their DC plan they, the competitor, would provide senior executives of the company with free comprehensive financial advise. This advice would cover both plan and personal investments, as well as insurance needs. This seems to me to violate ERISA particularly with respect to using plan assets for the sole benefit of its participants. I explained to my client that if the competitor provided the advice to all plan participants there would not be a problem. However, by limiting it to a particular subset of the plan population I believe a violation would occur Was I right?

[Kirk Maldonado]

That smells bad to me. Remember that the DOL promulgated a prohibited transaction class exemption for IRA custodians that were giving away small gifts (e.g., toasters) to persons establishing IRAs. If that violated the prohibited transaction rules, this case seems even worse.

[pjkoehler]

Assuming that the plan assets are not used to pay the TPA's fees, then we lack a predicate fact for a ERISA Sec. 406(a) per se form of PT, viz. a transaction involving plan assets. We may also lack another predicate fact, a transaction between the plan and a party-in-interest, since the TPA is not a "service provider" with respect to the plan, merely because it has been engaged by the corporate plan sponsor to provide services to the corporate plan sponsor (not the plan).

We also may not have an ERISA Sec. 406(B) "self dealing" type of PT, since you haven't stated that the "free ancillary services" are consideration in exchange for the fiduciary engaging in a transaction involving plan assets. To the contrary, they seem to be consideration in exchange for the corporation entering into a contract with the TPA, with respect to which plan assets have no exposure to the TPAs performance or nonperformance.

The IRA CPTEs mentioned by Kirk can be distinguished, since there the IRA trustees/custodians were clearly "parties in interest" with respect to the IRA's whose assets they hold for the benefit of the account holder and the IRA account holder is treated as a fiduciary, with respect to the account, for PT analysis purposes. If the Plan's trustee (or other fiduciary or service provider) was offering the corporation "free ancillary services," we would have a fact pattern akin to these exemptions.

[This message has been edited by PJK (edited 07-05-2000).]

[Guest BNYMTC]

I'm a little confused. The TPA would be providing services to the plan. They would provide a bundled DC product to the plan (i.e. trustee, recordkeeping, investments, benefit disbursements, etc.). I also do not understand how it can be anything but self dealing. If a senior executive or any other plan participant were to walk in to the provider off of the street, thye would not receive free advice.

What was made clear to the executives at the plan sponsor was that if the provider was chosen to provide services to the plan, the executives of the company could expect to receive "free" ancillary services. These services would only be available to the executives if the sponsor were to hire the provider to service the plan.

The implication clearly is that becuase they would be making a return from providing services to the plan, they could afford to offer a select group of senior employees additional services. Isn't the plan is paying for these services, even if it is indirectly?

[pjkoehler]

BNYMTC, the only way you're going to get to a self-dealing PT issue is if you first have a "fiduciary," acting in a fiduciary capacity (i.e. exercising the kind of discretion that makes it a fiduciary), that causes the plan to enter into a transaction involving plan assets.

The "TPA" firm you've described is more than a third party administrator in the classic sense of "third party" to the plan. The firm is performing both fiduciary and nonfiduciary actions. With respect to its nonfiduciary role, you need to analyze who has engaged the firm. Typically, the corporate plan sponsor engages the third party administrator to perform ministerial services for the real "plan administrator," who typically is the board of directors of the corporation or its delegate. Most administrative services agreements are written by the TPA to stress that the TPA is not a fiduciary with respect to the services that it performs as a TPA. While this is far from dispositive as the TPA's ultimate classification as a "nonfiduciary," it was clearly not engaged by the plan and has no contractual right to receive payment of its services from plan assets in the event the corporation doesn't pay its fees. Such a TPA is intended to merely function as a contract service agent to the "plan administrator," which does not make the TPA a "service provider" to the plan within the meaning of ERISA's definition of "party in interest."

In accepting its appointment as trustee, the firm is a named fiduciary. But if the trust agreement is a directed trust, i.e. the trustee has little if any discretionary authority with respect to the investment or distribution of plan assets and is obligated to follow the instructions of other plan fiduciaries, then it would be reasonable to infer that the trustee does not have the kind of discretionary authority over plan assets in order to engage in a transaction involving plan assets as consideration for providing free ancillary services.

So long as the senior executives who benefit from the receipt of the free ancillary services are not plan fiduciaries themselves (e.g. if the board of directors is the responsible plan fiduciary making the decision to engage the firm as trustee and none of the execs sits on the board, or they recuse themselves from such board approval), then you're still not going to have a self-dealing type PT, unless the facts support an indirect PT because, for example, the benefitting execs have the power to appoint and remove the outside directors.

On the other hand, if the benefitting senior executives exercise the discretionary control or authority over plan assets that makes them fiduciaries to cause the plan to engage the firm as plan trustee and transfer plan assets to its custody in exchange for the free ancillary services, then you almost certainly have a self-dealing PT.

[Edited by PJK on 07-10-2000 at 02:31 PM]

[IRC401]

When you do your prohibited transaction analysis,

consider the possibility that the TPA is getting

an asset based fee from the investment organization.