Compliance November 2, 2012

DOL Investigations of Service Providers

November 2, 2012 (PLANSPONSOR.com) – The Department of Labor does not only investigate retirement plans, it also investigates service providers.
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During a workshop at the American Society of Pension Professionals & Actuaries (ASPPA) Annual Conference, Jeffrey A. Monhart, chief, Division of Field Operations, Office of Enforcement at the Employee Benefits Security Administration (EBSA), said entities subject to investigation include registered investment advisers (RIAs), investment advisers, investment managers, consultants and broker/dealers. “Service providers are always a party-in-interest, but they are not always fiduciaries,” Monhart explained, adding that the agency will determine fiduciary status of service providers based on facts and circumstances established through interview and records review.  

Information used to determine fiduciary status of a service provider includes the organizational chart, the products and services sold, affiliate relationships and compensation received through affiliates, as well as interviews with employees, affiliate employees and clients. The DOL determines the entities it will investigate through many sources, including retirement plan participant complaints, Form 5500 filings, media reports, other regulators’ actions and Securities and Exchange Commission (SEC) investigations.  

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Monhart said the DOL is attuned to situations where the provider is both managing and valuing investments; there could be a conflict-of-interest if compensation is tied to assets under management. The agency also looks for misrepresentations about portfolio holdings, for example, stable value funds that include holdings in risky investments.

In addition, investigators look at what is done with “float” compensation, whether it is retained as additional compensation or rebated to plans and whether the service provider discloses to plan sponsors what it does with the “float.” Service providers may hold plan assets in their own bank accounts while waiting for investment directions from participants; and/or distribution checks to be cashed. The short-term earnings generated in their bank accounts are generally referred to as “float.”  

“Making a profit is not a problem, the question is, is there a fiduciary using its authority, directly or through an affiliate, to increase its profits?” Monhart noted.  

Monhart mentioned as examples of service provider investigations the recent investigation of USI Advisors which found the investment adviser did not fully disclose the receipt of 12b-1 fees to clients (see “USI Advisors Settles DOL Suit Over Fees”) and the investigation of Morgan Keegan which found the broker recommended certain hedge funds to plans and in return received revenue-sharing and other fees (see “Morgan Keegan Ordered to Pay 10 Pension Plans”). He added that it is uncommon that the DOL sues a service provider; the agency will work closely with an entity to get it in compliance.
Benefits November 2, 2012

Report Suggests Reform of Military Retirement Benefits

November 2, 2012 (PLANSPONSOR.com) – A new report supports the Department of Defense's (DOD) proposal to overhaul the Pentagon's retirement system. 
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The Center for American Progress suggests military personnel with more than a decade of service could choose to stay in the current system or switch to a 401(k)-like plan; those with less than 10 years of service could enroll in the new system or a modified version of the current pension setup, which would vest at 10 years but “provide slightly less retired pay—40% of base pay at 20 years, rather than 50% permitted under the current system.”

The Pentagon now has a 20-year cliff-vesting retirement system, which some would like to replace with one that provides benefits to all service members regardless of their tenure. Personnel who serve less than 20 years (about 83%) do not receive a retirement benefit, which some say is unfair given their multiple deployments during the wars in Iraq and Afghanistan. Those who do spend a career in the military can hit the 20-year mark relatively early, retire from service in their 40s or 50s, draw a pension and work elsewhere. About 17% serve 20 years or more in the military.

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Last year, the DOD proposed a retirement system that would give some benefits to all troops and phase out the 20-year cliff vesting system. (see “DoD Panel Proposes Retirement Benefit Change for Troops”). 

“Military pay and health reform will allow the Pentagon to achieve substantial savings in the near term,” the report said. “Retirement reform, however, presents the greatest opportunity for savings.”

The report is here.

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