Scope of protecting participant account information not clear

By blocking access, sponsors may actually increase chance of harm

Jul 20, 2019 @ 6:00 am

By Phil Troyer

While plan fiduciaries should undoubtedly protect participants' confidential information, the scope of that duty is not entirely clear. By focusing solely on blocking access to participants' account information, plan sponsors may actually increase the likelihood their plan participants will be exploited for commercial purposes — especially at retirement.

The danger of adopting a complete hands-off approach to participants was best exhibited by the Department of Labor's prior position on rollovers. According to DOL Advisory Opinion 2005-23A, if someone who was already serving as a plan fiduciary provided rollover advice to a participant, it could be deemed a prohibited transaction. By contrast, if someone who was not a fiduciary to the plan recommended a rollover to a participant, it was not even considered fiduciary investment advice.


The fallout from this position should have been predictable. Plan advisers who were already subject to the fiduciary standard were discouraged from assisting participants when a termination event occurred. By contrast, brokers who had no relationship with the plan were free to swoop in and sell retired participants expensive investment products for big commissions.

Fortunately, the DOL eventually recognized this overly paternalistic approach was leading to the exact result it had sought to prevent. Its amendment of the "fiduciary rule" reversed Advisory Opinion 2005-23A by deeming all rollover recommendations to be fiduciary investment advice, regardless of the provider's prior fiduciary status.

Similarly, plan sponsors that seek to create a protective wall around their participants fail to appreciate that at some point, many of those participants will leave the plan with sizeable account balances and they'll have no idea how to manage them. In many cases, that is like throwing sheep to the wolves.

However, some plan sponsors have embraced a more nuanced approach. Rather than attempting to create a barrier, they have proactively engaged with advisers to ensure their participants will receive the guidance they need.

For example, a construction company that sponsors a very lucrative employee stock option plan recently insisted we provide holistic financial wellness counseling to its employees. At the same time, it required us to offer investment management services to its retiring employees at a reduced fixed rate to ensure they would receive appropriate advice at a reasonable cost as they departed the plan.

Such arrangements do not violate the law.

In fact, the standard proposed by the plaintiffs' counsel in Cassell, et al v. Vanderbilt University, et al is much more restrictive than the applicable regulations. For example, federal privacy laws (SEC Regulation S-P) do not apply to retirement plans. However, even when Reg S-P does apply, it actually permits investment advisers to market products and services to their clients and to enter into joint marketing agreements with unaffiliated third parties, so long as those activities are properly disclosed in the advisers' privacy policy. ​

Additional services

That is not to say additional protections for plan participants do not or should not exist under ERISA. For example, a plan adviser utilizing a third-party marketing agreement permitted under Reg S-P could be deemed to have engaged in a prohibited transaction under ERISA section 406(b). However, as long as it is charging a reasonable fee, ERISA section 408(b)(2) would permit the adviser to offer additional services to the plan and its participants.

All of this begs the question, which plan sponsor is truly acting in the best interests of its participants?

The one that blocks participants from receiving the advice many desperately need (thus leaving them vulnerable to exploitation from outsiders) or one that leverages its status to ensure its participants receive advice on fair terms from someone who is required to act in a fiduciary capacity?

Phil Troyer is chief compliance officer of Resources Investment Advisors and securities principal with Triad Advisors.


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