Administration June 28, 2019

Providers Reluctant to Serve Newly Allowed 401(k)s

Due to the misunderstanding about the intersection between state and federal Cannabis laws, lack of provider support may stop hemp and CBD companies from sponsoring 401(k) plans.
Reported by
Art by Alessandro Gottardo

With the passage of the 2018 Farm Bill by President Donald Trump, hemp and cannabidiol, or CBD, companies can sponsor 401(k) plans for employees and take advantage of the related tax deductions.

Josh Horn, partner and co-chair of Fox Rothschild’s cannabis law practice in Philadelphia, explains that hemp that has tetrahydrocannabinol, or THC, with a 0.3% dry weight, and CBD, which is derived from hemp, were taken off the controlled substance list by the Farm Bill. The bill also allows hemp farmers to apply for crop insurance, and, according to Horn, makes banking and finance systems available to these businesses.

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Michael Nepveux, an economist with the American Farm Bureau Federation, said in an article, “Uncertainty still exists about how and when regulations in general will be implemented and what those regulations will look like,” adding that regulators indicated it will likely not be until the 2020 planting season that definitive rules will be in place.

Matthew Able, senior partner at law firm Cannabis Counsel, PLC, and executive director of Michigan NORMAL [National Organization for the Reform of Marijuana Laws], says he had a couple of clients call about the new law. Clients are usually individuals or smaller companies, and they are not yet thinking about offering a 401(k). “If they make a lot of money this year, there may be a lot more action on that next year,” he says.

When they do think about establishing a 401(k), hemp and CBD companies may face obstacles. According to a blog post from Jewell Lim Esposito, an attorney with FisherBroyles LLP in Washington, D.C., “The real obstacle to implementing 401(k) plans for otherwise legal marijuana producers are the industry retirement plan providers who are nervous and jittery about dealing with ‘traffickers.’ In fact, they’re more than nervous. They have dug in their heels, refusing to do business with cannabis companies technically engaged in trafficking under federal law.”

Add nervousness to the confusion over dealing with the tax code, the Employee Retirement Income Security Act (ERISA), and “single employer” concepts, she says. “Companies that produce proper hemp are legal under the federal Controlled Substances Act (CSA). Yet, if those hemp companies are treated as related, under common control, or as a single employer with the companies the produce cannabis (illegal under the same federal CSA), plan providers have difficulty reconciling the intersection of tax, ERISA, and cannabis rules to see how 401(k) plans can be provided to all of them,” Esposito explains.

Providers are reluctant to do business with cannabis companies even though cannabis companies are legally able to adopt 401(k) plans, and U.S. Attorney General William Barr is on record with the stated intent to refrain from pursuing trafficking prosecutions against otherwise legally operating cannabis companies, according to Esposito.

Horn says, “In a nutshell, the federal government has historically taken a hands-off approach to medical marijuana and has indirectly not touched recreational use unless there is a crime like transporting over state lines. The Department of Justice has defunded prosecution efforts. It creates an interesting dichotomy between medical and recreational uses and the juxtaposition between federal and state laws.”

Even hemp companies not engaged with cannabis businesses will run into trouble because people don’t understand the difference between hemp and cannabis, so companies may not do business with them, Horn adds. He says there is a big learning curve.

Able says Cannabis Counsel did not have a problem finding a 401(k) plan provider; however, it had bank accounts closed twice, even though it’s just a law firm. He says branch employees are fine with handling the business, but when upper management sees the word “Cannabis” in the company name, they “freaked out.” The firm now goes by an assumed name.

Able says there is no recourse when providers refuse to do business with hemp, CBD or cannabis companies. “I don’t think the banks should have been able to close our account, but we have no recourse except to post a negative review on social media,” he says, adding that he and clients that have also had that happen can just chalk it up to “growing pains.”

When clients complain about it, Able tells them to contact their Congressperson; it’s a federal legislative issue. Fighting it is not successful in courts because the courts keep kicking it back to Congress.

He notes that companies can deal with paying their bills with cash, but they can’t use cash only when operating a 401(k) plan. “We will continue to have these issues as long as cannabis is a Schedule I controlled substance,” Able says. “The more trouble companies have, the better, because it will stimulate change. If everyone is fat and happy, there’s no reason to rock the boat.”

2018 New Frontier Data from the Hemp Business Journal shows the hemp industry is projected to grow to $1.3 billion by 2022, and CBD product sales are projected to increase to $430 million. For financial firms it’s a question of profits versus reputation.

Able believes it will be financial firms, not activists, that push cannabis off Schedule I because they want a piece of the pie. But, he warns that folks in the hemp/CBD/cannabis industry should be careful what they wish for. “The fact that cannabis is a Schedule I controlled substance and Section 280E of the Internal Revenue Code [which forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the ‘trafficking’ of Schedule I or II substances, as defined by the Controlled Substances Act] are keeping big business at bay. Once these issues are solved, we may see a big financial services firm getting into the business, running small providers out of it.”

Compliance June 21, 2019

What to Look for When Monitoring Retirement Plan Advisers

Plan sponsors have a duty to monitor retirement plan advisers, but may be forgetting to request or research certain information.
Reported by
Art by Marc Rosenthal

Spectrum Investment Advisors and Wintrust Wealth Management are two advisory practices that proactively share their regulatory filings with their plan sponsor clients. They say they do so in order that their clients are aware of all of their fees , the scope of their services and to be briefed on details on their practices.

However, these advisory practices are most likely not the norm, which could present a problem for plan sponsors because the courts and the Department of Labor (DOL) have determined that retirement plan sponsors have a duty to monitor their services providers—including their retirement plan adviser or consultant, says Jim Scheinberg, managing partner and chief investment officer of North Pier Search Consulting in Marina Del Ray, California.

In May 2015, Scheinberg notes, the U.S. Supreme Court ruled in favor of the plaintiffs in Tibble v. Edison International, ruling that when a plaintiff brings a claim under the Employee Retirement Income Security Act (ERISA) for an alleged failure to monitor plan investments and remove imprudent ones, the duty to monitor starts at the time of the alleged monitoring failure. This overruled the six-year outside time limit for claims of breach of fiduciary duty in the Employee Retirement Income Security Act (ERISA).

In addition, DOL has “issued a couple of publications that specifically outline the duty to monitor service providers,” he adds. “There is no good ‘duck and cover’ excuse for not doing so, especially among larger plans. The failure to monitor registered plan advisers’ regulatory disclosure information is a vulnerable area of fiduciary process for aggressive attorneys to exploit during ERISA lawsuits.”

Scheinberg continues: “There is little doubt that frequently monitoring registered retirement plan adviser disclosure information through FINRA’s BrokerCheck; IAPD [Investment Advisor Public Disclosure] database and Forms ADV filed with the SEC [Securities and Exchange Commission] and information filed with state regulators is a necessary part of the ‘duty to monitor’ envisioned by ERISA and the current regulatory regime.”

Scheinberg says few sponsors are aware of their need to stay on top of their advisers’ regulatory filings, but just as sponsors now know that they need to continuously monitor their recordkeepers, he believes the same will happen with advisers.

While Scheinberg believes plan sponsors should be monitoring advisers on a continuous basis, his firm is primarily hired to review an incumbent before hiring or to review requests for proposals (RFPs) or requests for information (RFIs).

Clear Disclosure Partners in Lake Leelanau, Michigan, is another company that has been conducting these searches for plan sponsors since 2017. “Most plan sponsors don’t know that this is something they should be doing,” says Dave Dickson, president. Monitoring advisers is important, he maintains: “We have found all kinds of irregularities.”

For example, Clear Disclosure Partners learned of one adviser who began forming personal relationships with participants in a 401(k) plan and then encouraging them to take out loans from their plans in order to invest in a new tech business the adviser was forming, Dickson says.

North Pier Search Consulting learned of an adviser who had invested in a private debt offering. While the state regulator determined that the adviser was not offering this investment to the 401(k) plans he was serving and decided to permit the adviser to continue his 401(k) consulting practice, when the plan sponsor learned of this potential conflict of interest, it decided to terminate his contract, Scheinberg says.

So, it is not just the regulatory filings that sponsors need to monitor, but it is also fees, potential conflicts of interest and services being rendered, he says. “Most advisers are not going to run afoul of regulatory issues,” he says. “Sponsors should be checking to ensure the quality and appropriateness of services are at a tenable level, that they are meeting DOL’s standard of procedural prudence.”

Additionally, if a sponsor has hired an adviser to act as a 3(38) fiduciary to select and monitor investments, it is still the responsibility of the sponsor to ensure that the advisers are following the rules and regulations of the industry, Dickson says.

Spectrum Investment Advisors shares with every client its disclosures on Form ADV, 408(b)(2) and their fees in the 404(a)(5) notice created by the recordkeepers, says Manual Rosado, vice president/partner with the practice, based in Mequon, Wisconsin.

“The recordkeepers do not necessarily pull adviser fees into their 404(a)(5), but we have worked with our plan sponsors and recordkeepers to make sure that our fees are added to this file,” Rosado says. “We have developed a fee matrix, trying to pull all of this information onto one page—revenue-sharing, recordkeeping fees, advisory fees—and benchmark the fees to similar size plans so that the plan sponsors can easily identify their plan costs.”

Likewise, Wintrust Wealth Management discloses its regulatory filings and fee statements with clients right up front and makes these disclosures part of its contracts, says Dan Peluse, director of retirement plan services, based in Chicago.

Scheinberg says it might take lawsuits for plan sponsors to become aware of their need to stay on top of such information. However, both North Pier Search Consulting and Clear Disclosure Partners say that as retirement plan conferences begin to address this issue, and if they are successful in partnering with third-party administrators (TPAs) in making this part of their services, more plan sponsors are likely to begin to make monitoring advisers a central part of their best practices.

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