Financial Advisory Firms Own 401k Plan

[austin3515]

Plan Trustee (and owner of a financial advisory firm) wants to give his employees investment advice. He wants to have one of his employees (a series 7 advisor) serve as the registered advisor. Is this possible? The payments would flow through the advisory firm itself but the employer would not take a cut, it would just be a pass through (because it has to go through the broker/dealer, etc).

It seems to me that the Schedule C instructions refer to employees who receive wages for their services to the Plan. That is what we are going for here.

Is this possible?

[Peter Gulia]

Here’s an interpretive rule:

http://www.gpo.gov/fdsys/pkg/CFR-2014-title29-vol9/xml/CFR-2014-title29-vol9-sec2550-408c-2.xml

And here’s an advisory opinion:

http://www.dol.gov/ebsa/programs/ori/advisory97/97-19a.htm

The idea is to include in “direct expenses” the “salary and benefits paid to certain employees who are engaged full-time to provide administrative services to the Plan, and whose position would be terminated if [the employer] should cease providing services to the Plan[.]”

Another advisory opinion recognizes that an employer may be reimbursed for the wages of a full-time employee who provides services to a group of pension plans if none of his or her services is for anything beyond the plans and his or her employment would not continue but for the plan fiduciary’s decision to engage the employee’s services:

http://www.dol.gov/ebsa/programs/ori/advisory93/93-06a.htm

I have rendered advice about arrangements that used the logic of these interpretations on looser facts.

But a third-person broker-dealer’s payments might be difficult to characterize as “salary” or as “direct”.

[mbozek]

This is too complicated to be discussed without having counsel review all of the applicable laws including the rules under FINRA that govern the payment of commissions to registered reps. I know Series 7 brokers who are brokers of record on their own IRA accounts or accounts of family members who avoid ERISA/PT issues by waiving their commissions. I don't know if this would be a PT if the Broker received incentive comp or bonus from plan sponsor for meeting certain level of commission sales even if no commission is paid on the 401k trades. Financial services industry comp is extremely complicated and there are many forms of comp that may be a problem when retirement plans are the client.

[Peter Gulia]

mbozek is right that broker-dealer compensation, insurance-agency compensation, and other forms of indirect compensation bring in further complexities not only under ERISA but also under banking, insurance, and securities law.

(By the way, when I was in-house to a financial-services business, even a rep who renounced his or her commission, incentive compensation, production credit, and contest-qualifying measures still could not be involved in any business with a retirement plan or IRA regarding which he or she was a party-in-interest.)

On austin3515's query about what's feasible, it might turn on an economics question: Does the inquiring fiduciary find that providing the advice to the plan's participants is important enough that the inquirer or the plan will pay for the advice of a lawyer who is experienced on all relevant laws? If not, anything that involves any party-in-interest or any person concerning which a fiduciary, an investment adviser, or an investment adviser's representative has an interest ought to be a non-starter.