WASHINGTON -- The Labor Department for the first time has mentioned compensation received by defined contribution service providers in discussing its national enforcement policies.
"Wouldn't it make more sense to investigate an administrator who may be doing the same thing with a number of plan sponsors, thereby revealing multiple violations, rather than one violation of a plan sponsor?" asked Virginia C. Smith, director of enforcement for the Pension and Welfare Benefits Administration.
In an attempt to make the most of increasingly stretched resources, the PWBA has released two programs -- one a voluntary fix-it program and, the most recent, its "strategic enforcement plan."
PWBA's new voluntary fiduciary correction program, unveiled in March, encourages plan sponsors to voluntarily identify, and fix, violations of the Employee Retirement Income Security Act. Meanwhile, the strategic enforcement plan, released last month, outlines PWBA's national enforcement priorities, Ms. Smith said.
Needing attention
The PWBA says service providers and defined contribution plans are two of its "national investigative priorities" for 2000. (The other is health-care plans.)
"Those are things we have identified over the years that need our attention," Ms. Smith said.
According to the PWBA's plan, called StEP, the term "plan service providers" includes any person or company that gets paid for providing direct or indirect service to a plan. This can include third-party administrators, accountants, investment management companies and insurance companies.
One example from the PWBA: A third-party administrator systematically retains an undisclosed fee. While Ms. Smith said it was only an example, ERISA attorneys say the mention is significant.
"The reason this is significant is that a greater number of service providers . . . are receiving payments from mutual fund companies, insurance companies and others who provide investment products for 401(k) plans," said C. Frederick Reish, an ERISA attorney in the Los Angeles-based firm of Reish & Luftman.
But many service providers do not believe the attention from the PWBA is warranted, Mr. Reish said.
"The PWBA is wasting its time investigating third-party administrators charging fees for services but not managing investment products," he said.
One of the keys the PWBA looks at is whether the service provider is being paid appropriately and, if the service provider is a fiduciary, whether it is using plan assets for its own benefit, PWBA's Ms. Smith said.
It is unclear how many third-party administrators and others who receive these payments from money managers disclose them to plan sponsors, he said.
"If the service provider is inappropriately using plan money to increase its compensation, we will investigate that," noted the PWBA's Ms. Smith.
Enforcement of undisclosed fees could have the most effect on record keepers when the market experiences a sustained downturn, consultants say.
"When the market goes sideways and everyone is flat, this is the one thing you can measure. How much did the plan pay in direct and indirect costs?" said Ward Harris, of McHenry Consulting Group, Berkeley, Calif.
Adding up
And these fees to record keepers can amount to a lot of money, Mr. Harris said. For example, a record keeper of a $10 million plan could be receiving up to $50,000 per year in rebates from money managers in exchange for being included in the record keeper's array of funds offered to plan sponsors, he said.
"There is no way for the plan sponsor to tie hard or soft costs to any measure of reasonableness," Mr. Harris said. "If the plan sponsor is not aware and accountable for what it is spending for participants, then it's not a good fiduciary."
What's missing from the StEP, however, is what type of cases the PWBA will be taking on, said Andree St. Martin, partner with the Washington-based law firm The Groom Law Group.
"It's hard to know what the department will be going after," she said. The best information is from clients and what issues are coming up in actual cases, she added.
Ms. Smith acknowledged the 10 regional offices are given free rein to develop their own enforcement projects, which are not publicized. However, of the six national enforcement projects, three involve pension plans. They are: the employee contribution project that monitors plan sponsor delinquencies in transferring employee contributions into their defined contribution plan; 401(k) fees; and, a new project, orphan plans where the fiduciary has deserted the plan because of death, incarceration or the company is bankrupt, Ms. Smith said.
As for rebates paid by money managers to record keepers and bundled service providers, the Department of Labor has mentioned them in its advisory opinions and in responses to applications for prohibited transaction exemptions mainly concerning participant investment advice, Ms. St. Martin said. "There is some guidance, but it is not in one place," she said.
"The DOL is brilliant that in highlighting their enforcement efforts, they have said close to nothing," about what they will be investigating, said Kyle Brown, retirement counsel for Watson Wyatt Worldwide's research and information center, Bethesda, Md. "They are reminding people that there is a cop on the beat. They are publicizing their enforcement activities to encourage voluntary compliance by others."
The PWBA has been "sensitive" about fee arrangements between record keepers and bundled providers that have not been disclosed to plan sponsors, but, overall, the StEP is not specific enough, Mr. Brown said.
Watson Wyatt has had offices audited by the Department of Labor in the past, he said. "They focus on following the money, but we do not do that because we do not handle the money except for our fees, and our fees are not abusive," he said.
Consulting fees
One issue that the Department of Labor has examined at Watson Wyatt is the payment of consulting fees from plan assets, Mr. Brown said. One client whose case was settled last month was audited on the consulting fee issue.
"The auditor took a more conservative viewpoint than the DOL guidance on the issue," he said.
Meanwhile, targeting specific individuals or companies are identified for investigation is a way of rationing stretched resources.
Another way is the new voluntary fiduciary correction program, which encourages plan sponsors to voluntarily identify, and fix, violations of the Employee Retirement Income Security Act, , Ms. Smith said.
"We hope if the VFC is a success it will free up our enforcement resources to correct the more egregious problems," Ms. Smith said. "We're trying to give the carrot and the stick."
