Fiduciary Concerns - Seeking Opinions

I've been asked a question that I don't think is black and white but certainly smells funny if not outright bad.

Start-up payroll/TPA companies appear to be offering free payroll services to companies that move their 401(k) plans to their TPA arms. Is this a fiduciary breach by the plan sponsor? Maybe, or with certainty?

If the primary (any?) decision criteria to move the plan is the unrelated benefit to the plan sponsor and not solely in the best interest of plan participants, then that is clearly a breach, is it not?

But does the mere appearance of a conflict of interest (and breach) mean that there is one? Would a participant even know? Would this even be discoverable upon a routine audit? Or are these types of arrangements littering the skies flying under the radar without scrutiny?

I remember reading either something similar a few years back, where some economic benefit is offered to the employer if plan administration is moved, and thought the opinion or consensus then was it didn't pass the smell test.

Thoughts and opinions please.

Among the many issues in the ABB fiduciary-breach litigation, the plaintiffs asserted that allowing Fidelity to lower fees for other services, including payroll services, because Fidelity was getting more than enough revenue from retirement plan investments and services was a fiduciary breach and a nonexempt prohibited transaction.

From Judge Laughrey’s opinion: “[O]nce Mr. Scarpa became aware that the PRISM [401(k)] recordkeeping fees appeared to be subsidizing ABB’s corporate programs, he had a fiduciary obligation to investigate and prevent any future subsidy.”

Tussey v. ABB, Inc., No. 06-cv-0430-NKL, 52 Empl. Benefits Cas. (BL) 2826, 2850, 2012 BL 84927, 2012 U.S. Dist. LEXIS 45240, 2012 WL 1113291 (W.D. Mo. Mar. 31, 2012) (finding loyalty and prudence breaches), further proceedings not cited (the case litigated for 12¼ years).

Almost makes you want to call the DOL and report them.....

39 minutes ago, MoJo said:

Almost makes you want to call the DOL and report them.....

Indeed no.  Rather, it makes you want to identify their clients so you can go after them.

A disloyal or imprudent fiduciary burdening an employee-benefit plan with expenses that reflect a service provider’s offer of “free” services for something other than the plan likely happens more often than we read about.

If the plan’s fiduciary gets no advice from anyone beyond the service provider that offered the arrangement, how likely is it that the employer/administrator’s Form 5500 report will disclose a prohibited transaction?

I've always wondered why companies don't offer free or reduced 401(k) plans to people that buy the payroll services.

18 hours ago, CuseFan said:

Thoughts and opinions please.

I think it is black and white. The plan is subsidizing the company. Kind of ironic that these same companies will push fiduciary liability insurance for a few extra basis points ("you want fries with that?") and then do something so blatantly wrong that puts the fiduciary at risk.

BenefitsLink neighbors, using our experience and observations, let’s ask this question:

_____% of small-business employers innocently do not know that it is improper to allow a retirement plan to subsidize a lowered expense for some other service.

_____% know it is improper, but allow it anyhow.

Your thoughts?

Thanks everyone for your valued opinions.

My only thought about it being gray rather than black or white was what if the sponsor (or a third party) did a diligent search and chose the TPA independently first and then such TPA offered free or reduced fee payroll services to their new client and there is documentation of such process? What if 401(k) fees were the same whether free/reduced payroll services were accepted, would that matter? I'm definitely not arguing for this, but if alerting a fiduciary about a potential breach (whether client or prospect) and calling out service providers that are facilitating such breaches, I would want to know if there is a fact pattern where this would be permissible. Ultimately, I would steer fiduciary to qualified legal counsel but business owners usually need a very compelling push to incur such legal fees.

18 hours ago, david rigby said:

Indeed no.  Rather, it makes you want to identify their clients so you can go after them.

Our positions are not mutually exclusive.  Call the DOL, then go after their clients!

2 hours ago, MoJo said:

Our positions are not mutually exclusive.  Call the DOL, then go after their clients!

Dang MoJo, this really has you fired up!

3 hours ago, CuseFan said:

My only thought about it being gray rather than black or white was what if the sponsor (or a third party) did a diligent search and chose the TPA independently first and then such TPA offered free or reduced fee payroll services to their new client and there is documentation of such process? What if 401(k) fees were the same whether free/reduced payroll services were accepted, would that matter?

That's a fair question and valid point, and maybe why they can "get away with it." Of course that means that ABC Company's plan, with a plan but not payroll services, is subsidizing MNO Company with both plan and payroll, and XYZ Company with only payroll service.

CuseFan, there can be circumstances in which fees might relate to shared or coordinated services, with an experienced fiduciary’s prudent attention to protective conditions and reasoned accounting.

But in the situation your opening post describes, wouldn’t a good fiduciary ask the service provider whether it would charge the employer a regular fee for the payroll service, and lower the fee charged to the retirement plan?

Does the service provider’s offer of “free” payroll services suggest that the retirement plan’s fiduciary might not have selected or negotiated the best deal the plan could obtain? (Whether with the same provider, or by selecting a different provider?)

When one fee otherwise would burden the employer and another fee burdens the plan, shouldn’t whatever combined fee lowering is available favor the entity the ERISA-governed fiduciary owes its exclusive-purpose loyalty to? And shouldn’t the retirement plan’s assets not benefit an entity about which the plan fiduciary might, even indirectly, have a compromising interest that could interfere with the plan fiduciary’s unimpeded decision-making for the plan’s benefit?

Observe that the conflict might be less (but not completely removed) if the employer pays the retirement plan’s fees from the employer’s assets, with nothing charged to the plan.

I concur with your observation that one might not call out a seeming breach, at least not without having collected and analyzed the facts. (Even if I saw an obvious breach, I wouldn’t say anything other than to my client.)

Knowing that many plan fiduciaries do not get a lawyer’s advice (even when the retirement plan properly could pay that fee) motivated my question:

What percentage of small-business employers innocently do not know that it is improper to allow a retirement plan to subsidize a lowered expense for some other service?

Thank you again Peter for more valuable insight and I don't disagree with anything you said. 

With respect to your poll, I don't have a feel for that. I suspect it is a very high percentage who innocently (probably not the best term there) do not know they are engaging in a fiduciary breach - and many likely do not equate a conflict of interest as a fiduciary breach. But that is just a hunch without any experience to support, FWIW.

I too suspect that many are unaware that one has a fiduciary responsibility to the retirement plan; of those who know they are a fiduciary, many don’t see the conflict; and very few get real advice.

2 hours ago, RatherBeGolfing said:

Dang MoJo, this really has you fired up!

You get to a certain age and you lose your "filters."  I deal with enough ... from the DOL that it's time I turn them loose on something really egregious....

Great discussion and good points.  The sad truth is most business owners in the small to mid-size market wouldn't care it they are able to save a penny.  We targeting TPA services, but what about banks?  I've had clients and prospects move their Plan because the bank was waiver a favorable letter of credit in front of them.  I am confident we do the right thing and regulations are geared at correcting a lot of these wrongs, which only impacts those that follow the rules.  We press on and remember, we can only lead that horse to water!!!!!

There are other services / industries where this happens.  I have known local banks to offer a quarter percent reduction on a commercial line of credit interrest rate if you bring your retirement plan into the trust detartment.  Bring your corporate banking relationship and we will knock off another quarter percent.  It is hush hush behind the scenes, but it goes on.  

What a can of worms…I see more work for attorneys and more regulation in our future…the story will continue.  Glad we have this venue to discuss such issues, and vent (professionally).

On 2/21/2024 at 3:10 PM, ErnieG said:

Great discussion and good points.  The sad truth is most business owners in the small to mid-size market wouldn't care it they are able to save a penny.  We targeting TPA services, but what about banks?  I've had clients and prospects move their Plan because the bank was waiver a favorable letter of credit in front of them.  I am confident we do the right thing and regulations are geared at correcting a lot of these wrongs, which only impacts those that follow the rules.  We press on and remember, we can only lead that horse to water!!!!!

Yup I worked for a bank's trust department doing the recordkeeping for the plans the trust department had the investments.  It was common back then for the bank to pretty much make it a condition of giving the company a badly needed loan to move the 401(k) assets to their trust department and we did the recordkeeping.  

I was 100% convinced this was a breach but the bank was pretty open about how the deal needed to happen in their mind.  

Among the challenges about arrangements of the kind ESOP Guy describes is that businesspeople communicate expectations in ways that evade detection by a banking, insurance, or securities business’s compliance, internal-controls, and supervision systems.

30 minutes ago, Peter Gulia said:

Among the challenges about arrangements of the kind ESOP Guy describes is that businesspeople communicate expectations in ways that evade detection by a banking, insurance, or securities business’s compliance, internal-controls, and supervision systems.

Indeed.  And salespeople promise things without understanding (or caring about) them.