Question 319: What does the recent Advisory Opinion tell us about the fiduciary responsibilities of the parties to an open MEP?
Answer: Advisory Opinion 2012-04A (herein referred to as the "Opinion") concludes that open MEPs are not a single ERISA plan but are really a series of separate plans. The Opinion spends very little time analyzing the effect of that statu, but it spends a paragraph discussing the fiduciary issues related to a MEP, thus giving some idea that the DOL considers those issues to be important. In fact, if I had to guess (and this is just a guess, because the Opinion does not address policy considerations), concern over fiduciary responsibility weighed heavily in the outcome to rule that an open MEP is a series of separate plans adopted by each of the underlying employers.
Let's begin our analysis with that paragraph of the Opinion, which makes 3 points, which I number for convenience:
Let's take this piece by piece:
- Importantly, we note that persons who operate the arrangement would be subject to the fiduciary provisions of Title I to the extent they have control over plan assets or have discretionary control over the administration or management of the participating employers' separate plans.
- They would also be subject to the prohibited transaction provisions in ERISA section 406 to the extent they are "parties in interest" within the meaning of ERISA § 3(14) either as service providers to the separate employer plans or otherwise.
- Similarly, each employer sponsor of a plan that participates in the arrangement will be subject to ERISA's fiduciary provisions. See FAB 2002-3 (in selecting a service provider, plan fiduciaries must, consistent with the requirements of ERISA § 404(a), act prudently and solely in the interest of the plan's participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan).
Service Providers as Fiduciaries
The first point deals with plan fiduciaries. Just because an open MEP is not a single ERISA plan, but is rather a series of separate plans, does not mean that ERISA does not apply at all. It does apply. It applies to each separate ERISA plan and to its assets. And, as the Opinion points out, if you have discretionary management and control over an ERISA plan, you are an ERISA fiduciary. Likewise, if you have control over the assets of an ERISA plan (whether or not discretionary), you are an ERISA fiduciary. See ERISA § 3(3).
For example, consider the context of the Advantage Plan discussed in the Opinion. 401(k) Advantage LLC ("Advantage") is the party identified in the document as the Plan Sponsor (who, as Q&A 318 points out, is not the actual ERISA plan sponsor) and as the named fiduciary. Surely, in that role, Advantage is a fiduciary to each of the separate ERISA plans adopted by the underlying employers. That is not a real burden, because that is a role Advantage assumed in the first place.
The Opinion states that TAG Resources is the ERISA § 3(16) plan administrator. That would be easy to determine because the plan document designates the administrator. Obviously, the plan administrator has discretion over the plan and would be a fiduciary of all the underlying ERISA plans. Again, there's no surprise here. Similarly, if there is an ERISA § 3(38) investment manager, the manager would be a fiduciary to the underlying plans. There also might be additional fiduciaries who have been engaged by Advantage or TAG. They also would be fiduciaries of the underlying plans.
In fact, let's take a closer look at the investment trust used by a MEP. DOL Reg. § 2510.3-101 says (in simplified form) that if a plan invests in an unregistered non-operating investment held at least 25% by retirement plans, that the assets of the plan include both the assets the investment in the entity and an investment in the assets the entity holds. Put another way, the entity holds plan assets. We see this most often with common collective trusts and pooled separate accounts, but it also arises with certain hedge funds and other unregistered investments.
If this analysis is correct, then the MEP investment trust is an entity that holds plan assets, and as a result the trustee or others who control the trust are ERISA fiduciaries of all the underlying plans, because they control the assets of those plans. In the rubric of the service provider fee disclosure regulations, they perform "Services provided as a fiduciary to an investment contract, product, or entity that holds plan assets ... and in which the covered plan has a direct equity investment."
This issue will become more significant when we discuss Form 5500 filing.
The second point deals with prohibited transactions. ERISA § 3(14) defines "parties-in-interest" (the ERISA equivalent of the Code's term "disqualified persons") under the prohibited transaction rules as including both plan fiduciaries and plan service providers. Continuing the example of the Advantage Plan, Advantage and TAG are fiduciaries. They also appear to be service providers. The Opinion says, "Rather than acting in the interest of an employer with respect to the Plan, Advantage and TAG appear to be acting more as service providers to the plan, much like a third party administrator or investment advisor."
Frankly, this brings us to one of the most troubling areas of ERISA for many (but not all) open MEPs. The question is, are these fiduciaries engaging in prohibited transactions? There are frankly too many types of arrangements out there for us to analyze here, but a very important issue arising in connection with ERISA is whether the plan fiduciaries (as discussed above) are dealing with plan assets for their own account. (See ERISA § 406(b)(1) and Code § 4975(c)(1)(E).)
If a plan fiduciary is effectively able to set its own compensation (directly or through a related party), the arrangement is an act of self-dealing and a prohibited transaction. See Advisory Opinion 93-24A. The way to address the problem is to have full disclosure and negotiation with an independent plan fiduciary. In other words, the plan administrator, for example, needs to negotiate fees with an independent fiduciary (perhaps whomever the document names as the lead employer).
The Opinion cites FAB 2002-3. The primary issue in that opinion deals with float compensation, but the principles in the bulletin go well beyond it. FAB 2002-3 states:
In Advisory Opinion 93-24A, the Department expressed the view that a trustee's exercise of discretion to earn income for its own account from the float attributable to outstanding benefit checks constitutes prohibited fiduciary self-dealing under ERISA § 406(b)(1). Advisory Opinion 93-24A dealt with a situation where there was no disclosure of the float to employee benefit plan customers. In a subsequent information letter to the American Bankers Association (August 11, 1994), the Department indicated that "... if a bank fiduciary has openly negotiated with an independent plan fiduciary to retain float attributable to outstanding benefit checks as part of its overall compensation, then the bank's use of the float would not be self-dealing because the bank would not be exercising its fiduciary authority or control for its own benefit. Therefore, to avoid problems, banks should, as part of their fee negotiations, provide full and fair disclosure regarding the use of float on outstanding benefit checks." (Emphasis supplied).Note that there is an exemption, in ERISA § 408(b)(2) (a section that will live in infamy), for reasonable compensation paid to a service provider under a reasonable contract for services the plan needs. But as the regulations under that section point out, the exemption does not apply to the ERISA § 406(b)(1) prohibition against fiduciary self-dealing. In other words, it isn't enough that a fiduciary's contract and compensation are reasonable. If the fiduciary, directly or indirectly, has the power to set his or her compensation, then the contract must also be negotiated in good faith, after full and fair disclosure, with an independent fiduciary.
In general, the concepts of open negotiation and full and fair disclosure, as used in the 1994 letter, are intended to ensure that service providers provide sufficient information concerning such arrangements so that plan fiduciaries can make informed assessments concerning the prudence of the arrangements. Further, those concepts are intended to ensure that the amount of the service provider's compensation is determined and approved by a fiduciary independent of the service provider so that prohibited self-dealing is avoided.
So, if the "Plan Sponsor" named in the document is approving the compensation of the Plan Administrator, and the two parties are affiliates, or their independence is otherwise compromised, the arrangement with the administrator is a prohibited transaction, whether or not it is reasonable.
I believe some MEPs take a different approach, and say that the independent fiduciary approving the compensation is each individual employer cosponsoring the plan. I don't see how that can fly. Realistically, if I am one of 500 employers cosponsoring a MEP, I have no ability to adjust the fee arrangements of the key operators of the MEP. I either choose to put my employees' funds there, with whatever fees exist, or I choose to take their money elsewhere. There is no "open negotiation" at that level, even if there is full disclosure.
Sponsor Fiduciary Duties
This brings us to the third point. The Opinion states that the true ERISA plan sponsor (generally an individual employer with employees participating in the plan) is also an ERISA fiduciary. It says so very clearly, without equivocation. What fiduciary duties does the sponsor have? It must make that key decision, "Shall I put my employees' funds here?" which flows from ERISA's requirements of prudence and loyalty to participants and beneficiaries.
This becomes a critical decision in a MEP because it is the only decision the sponsor can make, and the choice is "take it or leave it." If you like the plan and the arrangements, but you don't trust the fiduciary, or believe the fiduciary is paid too much, then you need to look elsewhere. And it is not a one-time decision, because it includes the duty to monitor the plan on an ongoing basis.
This Opinion did not arise in a vacuum. It arose in the context of the Matthew Hutcheson case, and obviously, comparing the request for a temporary restraining order in that case to the Opinion issued the same month, the two were coordinated. Does that mean the DOL is concerned that all MEP fiduciaries are at risk of stealing from their clients (which, I hasten to note, has not been proven against Mr. Hutcheson), or that they are more likely do so than single employer plan fiduciaries? Of course not; that's silly. But if it turns out that employees in the plan involved in the Hutcheson case lost money, the Opinion implies that they might have a lawsuit against their employer if the employer did not engage in a prudent process in selecting and monitoring the MEP.
FAB 2002-3, cited by the Opinion, states:
In carrying out these responsibilities, the Department has indicated that a plan fiduciary must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided. In addition, such process should be designed to avoid self-dealing, conflicts of interest or other improper influence.Remember, the fiduciary we are talking about at the moment is the employer, trying to decide whether to entrust the employees' money to a given group of fiduciaries and other service providers in exchange for a given set of services. And like any other judgment, while ERISA does not expect perfection, it does expect diligence in pursuing an objective, deliberative process. What should the employer be looking for?
High on the list has to be avoidance of prohibited transactions. That's the whole idea of a process "designed to avoid self-dealing, conflicts of interest or other improper influence." In other words, if the employer negligently entrusts the employees' money to individuals that, based on the objective facts, are engaging in prohibited transactions, as described above, the employer could be held to account.
Reasonableness of fees is another key issue. How much is everyone involved in the plan getting and who is paying it? Are there better deals available for the employees? It would not be inappropriate for the employer to request the service provider fee disclosures for the key fiduciaries and other providers serving the plan so that the employer can better assess all the fees and any underlying conflicts of interest.
We also need to evaluate "qualifications" and "quality." Obviously, this brings us to the structure of the MEP, the services to be provided, the availability of investment education or advice in a participant directed plan, the caliber of the investment options selected for participants (or of the manager doing the selecting) and a host of other issues.
We are dealing here with a very competitive market. Open MEPs compete with each other and with other retirement plan arrangements and service providers. And the DOL has put employers on notice that the decision to participate in a particular open MEP, rather than use an alternative MEP or an alternative arrangement, is a fiduciary decision.
For further discussion of the qualification issues related to MEPs in general, see Chapter 18 of the new 6th Edition of my book, Who's the Employer.