How is a fiduciary penalized for engaging in a "conflict of inter

[Moe Howard]

The service provider (investment advisor)of the 401(k) plan also happens to be a participant in the plan & a LLC member of the plan's employer. He charges the plan a fee for his investment advisory services. It seems to me like he is "two types of fiduciary" ....1) He selected the trustee and 2) He is a service provider to the plan.

All accounts are participant directed... which probably means that he has little of no liability as a fiduciary in 1) above.

But it is also my understanding that because he is a "party in interest" in 2) above ....plus he receives regular compensation/salary from the employer (as a full time employee/LLC member) .... then, his providing of investment advice to the plan (as a service provider) is a conflict of interest & prohibited under ERISA section 406.

What would the DOL do about this conflict? Could the DOL charge him a $$penalty? Or does his conflict first have to result in a monetary harm to the plan or a participant before he could be penalized? He seems to be doing a good job, no one has complained and he charges only a nominal fee.

[Jon Chambers]

Let's assume that the investment advisor is a disqualified person, and consequently, the investment advisor's compensation constitutes a prohibited transaction (PT). For all transactions occurring after 8/5/97, the Code imposes a 15% penalty tax on a disqualified person for each year or part thereof that the transaction remains uncorrected. Thus (for example), the tax would equal 15% of the 1997 PT compensation for 1997, 15% for 1998, 15% for 1999, 15% for 2000 and 15% for 2001. A similar fact pattern would apply to 1998 PT compensation. Finally, the IRS can impose an additional tax of 100% of the uncorrected PT.

I would observe (without any legal argument) that the issue may turn on who pays the compensation. If the compensation is paid from plan assets, it's almost certain that there is a PT issue. If the employer is paying the advisory fee, there may or may not be a PT. I'd suggest contacting legal counsel for a definitive opinion on the matter.

[Jon Chambers]

Moe, the penalties described above are IRS levies. It is also possible that the DOL could require the advisor to repay the plan all fees paid, plus a 20% civil penalty.