Holding Data for Ransom

[Rball4]

Recently won a client with 3 small DB plans (80, 20, and 5 participants). The prior actuary is refusing to release the data unless the client pays exit fees of $500 per plan (they are paid up otherwise).

Questions:

1) Are exit fees common? In over 15 years, I have not seen them (especially in the small market). $500 for a 5 person plan seems rather excessive.

2) In my view they are essentially holding the data for ransom. Based on IRS Circular 230 and actuarial code of conduct, I don't believe this is allowed. Plus, this fee was not previously disclosed to the client.

3) Coincidentally, a couple of years ago this firm took a client from us (with 3 DB plans). We transferred the data and answered follow-up questions (no fees charged). I asked for the same professional courtesy, and they are flat out refusing.

Options?

[Andy the Actuary]

A delightful sticky issue.

Let's start by supposing this is the 1950s, you are in the automotive repair business, and your former customer is attempting to obtain his servicing record from you. And you store servicing tickets in boxes by year in numerical ticket order. To what extent should you work for free? On the other hand, if you have a client folder, you might want to provide copies so long as the client is willing to pay reproduction costs.

Now, back to the present. If the client were audited by the IRS who demanded the data, doubtful the former actuary would hold the data hostage. It's a small client and sounds like a small actuarial firm that may or may not been employed under an engagement agreement and even so, such agreement might not have covered data transfer in the event the working arrangement was terminated.

My own position is that I'll entertain discussion to provide gratis information that the client hadn't sent me and that I hadn't sent to the client. Thus, if the new actuary were arrogant and annoying, I would indicate that I have operated from census sheets the client has provided and the new actuary should obtain these from the client. If the new actuary wants me to save him time, too bad.

In my past life working for a major actuarial firm, I saw situations where big dollars were charged for data transference.

In you client's situation, I advise the client to pay the $1,500 but make sure you understand what information your getting and in what format. Else, the client cost may greatly exceed what you have presented as a $1,500 rip off. And you need the data now and not after some lengthy legal or ethics battle.

Keep in mind. This is not your dog. The client needs to decide how to proceed. You need the data one way or another and its the client's money.

Still, you hate to see people stepped on but bull your neck.

End of consulting sermon. I'll personally email you to instruct where to send my consulting fee. This was covered in my engagement agreement!!!

[Peter Gulia]

If, after considering advice (which might include advice similar to Andy the Actuary's observations), your client tries an effort at persuasion based on the Circular 230 rule, some of the potential counter-arguments might be about whether the preceding actuary is a practitioner and whether the data sought is the actuary's work product (rather than the client's original records).

31 C.F.R. § 10.28 Return of client’s records.

(a) In general, a practitioner must, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations. The practitioner may retain copies of the records returned to a client. The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section. Nevertheless, if applicable State law allows or permits the retention of a client’s records by a practitioner in the case of a dispute over fees for services rendered, the practitioner need only return those records that must be attached to the taxpayer’s return. The practitioner, however, must provide the client with reasonable access to review and copy any additional records of the client retained by the practitioner under State law that are necessary for the client to comply with his or her Federal tax obligations.

(b) For purposes of this section, Records of the client include all documents or written or electronic materials provided to the practitioner, or obtained by the practitioner in the course of the practitioner’s representation of the client, that preexisted the retention of the practitioner by the client. The term also includes materials that were prepared by the client or a third party (not including an employee or agent of the practitioner) at any time and provided to the practitioner with respect to the subject matter of the representation. The term also includes any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner, or his or her employee or agent, that was presented to the client with respect to a prior representation if such document is necessary for the taxpayer to comply with his or her current Federal tax obligations. The term does not include any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner or the practitioner’s firm, employees or agents if the practitioner is withholding such document pending the client’s performance of its contractual obligation to pay fees with respect to such document.

I'm curious: What are the provisions in the actuaries' professional-conduct rules?

[david rigby]

1. Not yet universal, "exit fees" are becoming more common. Not disagreeing with Andy, it also may be possible the plan sponsor can negotiate this fee. IMHO, $500 for each plan might be unreasonable.

2. "Ransom" is a pretty strong word. Subject to any possible service agreement (written or implied), it is reasonable for the actuary to ask for a fee, primarily because the actuary consolidated and "cleaned up" (we assume) the data from prior years. Having consolidated data is significantly different from having copies of the original data from each prior year. BTW, the same issue sometimes arises with respect to a 5500. It is likely you (the "new" actuary) don't really know what was "disclosed to the client."

3. Not much you can do about the lack of professional courtesy, short of asking the other guy to re-read Precept 10 of the Code. http://www.actuary.org/content/code-professional-conduct. You can always ask for guidance from the ASB. BTW, there have been multiple sessions on this topic at various Enrolled Actuary Meetings.

[Peter Gulia]

The American Academy of Actuaries Code of Professional Conduct [http://www.actuary.org/files/code_of_conduct.8_1.pdf],in Annotation 10-5 under Precept 10, seems to say an actuary "need not provide any items of a proprietary nature, such as internal communications or computer programs", and may require "reasonable compensation for the work required to assemble and transmit pertinent data and documents."

[hr for me]

Also back in the days of the one of the Big 3 HR consulting/actuarial firms, we used to charge the client for the employee time to get the data off our systems and into the format the new 401k administrator was asking for. (I don't remember too many DB plans changing firms) And it was never an easy format. Data came to us weekly/monthly/quarterly and the work we did on it was what made the output. The plan sponsor received written reports but it would take much more time to use a hard copy (we did on in-take via hard copy and it was so very painful and in the end they had to pay us to do so when it would have been easier/faster/cheaper to pay the prior recordkeeper but they didn't want to give them notice until we were 100% functional UGH!)

I don't know what they are asking for, but should realize while it is easier now to pull data, it still takes time. Especially if you want good records. And $500 per plan when you think of an hourly wage, truly isn't that much if you want it done well.

And why should the firm the plan is leaving lose out on that cost?

[Rball4]

These plans are very straightforward, and I know the software this firm uses. It literally should take an actuarial analyst 10 minutes (15 max) to open the program, open the data, select copy all, paste in a spreadsheet, and email over. I would certainly understand a fee if it was a complicated plan and there was a lot of work to be done, but that's not the case here. Also, part of administering DB plans on a yearly basis is to clean up the data. If extra work was needed while this plan was at the other firm, then they would have charged accordingly at that time.

Appreciate everyone's great feedback!

[hr for me]

That wouldn't be so fast at a large HR firm (or possibly even some smaller ones!). Anything that left our offices was reviewed by at least 3 employees - the one doing the work, their supervisor and then someone who checked what was being said in the communication and how. We didn't just "open the program, select copy all, paste in a spreadsheet, and email over."

There is some liability in making sure it is the latest data, correct information, etc. That there was a formal pass over of the data along with formal communication to the new firm and the old client. Many firms have much different controls in place especially when it is the last information they are sending that they won't have any chance to fix later should a mistake then be found that they would have liability for. That takes more than 15 minutes and is much different than sending a spreadsheet on a regular basis as the current firm.

You may know how you would do it. But that is not always how other firms operate. Especially the side losing and the side that wants to cover any potential future liability..

[BG5150]

Many times a lot of fees are flat for all plans. So some plans you make money. Some plans maybe not so much.

Exit fees are more than just exporting the data. There are internal processes to make sure the client is closed out on the systems and the data properly stored and archived.

As to your point #3, maybe your firms should start charging a discontinuance fee, too. Maybe not $500, but something that adequately pays for your time tending to the plan after they've left.

[Peter Gulia]

A plan's fiduciary might consider whether the data-exporting fee had been sufficiently disclosed to, and approved by, the fiduciary.

[Mike Preston]

And what do they do if after said consideration they decide that it wasn't? Just this just go to the issue of what entity pays the fee?

[Peter Gulia]

If a fee does not meet all conditions of ERISA section 408(b)(2) (or some other statutory, class, or individual exemption), it would be a nonexempt prohibited transaction, and a plan's fiduciary should not use plan assets to pay such a fee.

Although an employer may pay a fee from the employer's assets, a service provider that did not sufficiently disclose a fee for 408(b)(2) purposes might also have failed to get a binding obligation of the employer.

Some employers persuade a service provider to abate a fee that had not been sufficiently documented.