Labor Department focuses on retirement plan administrators

The enforcement arm of the Labor Department is investigating administrators of corporate retirement plans — including some that are registered investment advisers — to determine the kinds of fees that they receive from mutual funds and whether they are disclosing the fees to plan sponsors.

The Employee Benefits Securities Administration has been collecting documents — at times through subpoenas — from third-party administrators that conduct the labor-intensive, often low-profit tasks of processing retirement plan contributions and distributions for plan participants, according to lawyers, TPAs and custodians. TPAs are generally hired by plan sponsors, at times at the suggestion of investment product providers.

“They’re making some voluminous requests for information,” said William Anspach Jr., head of the employee benefits practice at Much Shelist Denenberg Ament & Rubenstein, a law firm that represents several small TPAs that the EBSA has subpoenaed this year.

“They want to confirm that plan sponsors are aware of money being received to see if they can catch us on something. Some of the audits are much more contentious than what you get with the [Internal Revenue Service],” Mr. Anspach said.

A former executive at a New England RIA with a retirement plan practice said that the “service provider audit” he observed at his firm last year wasn’t adversarial, consisting primarily of requests for information on revenue sharing and disclosure issues. The executive, who asked not to be identified, said that he has heard of several other TPAs who have been contacted or subpoenaed by regional offices of the EBSA.

A source familiar with the investigations, who asked not to be identified, said that the Labor Department turned its attention to TPAs as part of a broad multiyear look into the fees extracted from 401(k) and other retirement plans directly or indirectly by pension plan consultants, advisers, administrators, banks and fund companies, many of which have fiduciary duties to the plans.

It is a question of following the money, the source said, and the administrators — who generally aren’t fiduciaries — are the latest to come under the microscope. Many are being subpoenaed because they are small-business owners reluctant to volunteer information about their compensation, the source said.

Subpoenas imply neither guilt nor innocence.

“TPAs fall between the cracks in retirement accounts, yet they probably have a better handle on what’s going on in the plans than anybody,” said Donald Trone, chief executive of Strategic Ethos, a fiduciary consulting firm. “They’re in there every day tracking contribution rate changes, loan activities — you name it.”

Gloria Della, a spokeswoman for the Labor Department, said that the agency doesn’t comment on any aspect of its investigations.

The probes of TPAs come as more of them are considering becoming RIAs.

“It’s a very skinny, labor-intensive, scale-dependent business, and since many TPAs are asked by plans for advice on funds, it becomes natural for them to think of registering as RIAs,” said Skip Schweiss, president of TD Ameritrade Trust Co., a custodian for the investments of corporate retirement plans. “It’s a higher-margin business.”

Far more significant than any enforcement and policy conclusions generated by the EBSA investigations of TPAs, however, will be fee-disclosure rules that the Labor Department is expected to unveil this summer. They will affect not only administrators but any businesses that profit from retirement plans, including advisers, custodians and investment management and insurance companies that offer investment vehicles to plans.

‘COMPLETELY TRANSPARENT’

“They can investigate revenue sharing all day long,” said Brian Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries. “When the new rule comes out, all of this will be completely transparent.”

The anticipated rule revisions will derive from Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 and will require all service providers to offer plan participants complete disclosure of compensation before they sign contracts with plan sponsors.

The rules are likely to become effective by early next year and are going to be painful for many industry participants to implement, Mr. Graff said. Large product providers such as Fidelity Investments and Principal Financial Group that also offer custody and administration services face particularly large operational challenges if they are required to break out fees now bundled together as part of their investment product offering, Mr. Schweiss and other observers said.

But participants in 401(k) plans as well as plan sponsors and others with fiduciary duties should be big beneficiaries of fee disclosure rules, they said.

“They will be particularly valuable tools for advisers helping plan sponsors select their service providers,” said Mr. Graff, who defended revenue-sharing fees as essential for record-keeping services at the plan participant level that fund companies outsource to TPAs.

DAMAGING RULINGS

The disclosure rules, which are expected to include penalties for misrepresentations and other violations, would repair the damage that some Labor Department officials have seen in recent court rulings. In January, the Supreme Court declined to review decisions absolving Deere & Co. and Fidelity — the provider, custodian and administrator of the farm equipment manufacturer’s $3.1 billion 401(k) plan — of violating their fiduciary duties by allowing high plan fees and revenue-sharing arrangements among Fidelity subsidiaries.

If the Labor Department does issue new fee disclosure rules, the audits of TPAs are likely to increase.

“Once we get a road map to compliance on the books, exams will likely be more frequent and more rigorous,” said Jason Roberts, a partner at Reish & Reicher, a law firm that specializes in ERISA issues. He noted that several of his clients reached settlements with the Labor Department that require them to disclose fees and conflicts of interest to plans without admission of guilt.

E-mail Jed Horowitz at [email protected].