In light of what is widely being perceived as a new era in ERISA-related litigation, examination and enforcement, many of our broker-dealer and RIA clients are reexamining their service models to assess and manage fiduciary risk. The DOL is scheduled to finalize at least two more regulations this year that could significantly increase such risks, and Congress has indicated that it is prepared to fill in any gaps to protect retirement plan participants and their beneficiaries. Consequently, we are working with a significant number of broker-dealers and RIAs to develop and implement policies and procedures, including enhanced supervision, for servicing ERISA accounts. Some of these firms have announced new programs for qualifying producers to provide ERISA fiduciary services while others have elected to take a more product-centric approach and will only allow their producers to provide nonfiduciary services – particularly when proprietary investments are included as options within qualified plans.


Regardless of the approach taken, most BD/RIAs are implementing additional protections to manage the potential fiduciary and prohibited transaction risks associated with what the DOL deems “cross-selling” (i.e., using existing clients, plan participants and beneficiaries in this case, to market additional services or products). The prohibition on crossselling arises when a fiduciary uses the authority that makes him/her a fiduciary to cause him/her (or an affiliate) to receive additional compensation. The graph below represents the risk levels associated with this activity and highlights that this risk is the highest when the producer provides individualized investment advice to plan participants.


Based upon the foregoing, some firms are developing policies that would require the producer to provide documentation to the home office evidencing the fact that the plan participant had arranged for the provision of individualized investment advice on his/her ERISA assets from an unrelated, third-party adviser prior to opening an account for any participant of a plan serviced by that producer. There are a number of products and services that can serve as the outsourced advice solution. For example, a number of firms are looking to leverage their provider relationships and are limiting their selling agreements with recordkeepers – preferring to work with those offering advice programs. Others are conducting due diligence on “remote” RIAs that provide individualized investment advice to plan participants. Given that many advisers may rely upon cross-selling and rollovers to augment their plan level services, we recommend undertaking a review of current policies to ensure that such activities are consistent with regulatory and home office guidance. The list of action items below provides a step-by-step analysis to determine compliance with the aforementioned pending regulations. 
 

PT Risk Re: Cross-Selling/Rollovers

  Most Protection Proceed with Caution Most Risk
Is the Producer Rendering Investment Advice to the Plan? No.

No; individualized advice is not provided to the plan; the producer provides only non-fiduciary support.

For maximum protection outsourcing should be considered.

Yes.

For maximum protection outsourcing should be considered.

Yes.

Rollover and cross-selling activity should be carefully supervised to ensure it does not give rise to a prohibited transaction, and documents should describe those procedures.

Is the Producer Rendering Investment Advice to Plan Participants? No.

Participant advice is outsourced to independent third party; producer’s role is limited to investment education and standardized materials are used.

No.

Producer’s role is limited to investment education and standardized materials are used.

For maximum protection outsourcing should be considered.

Yes.

The producer should refrain from marketing rollover services or other cross-selling activity, and existing arrangements should be examined for compliance.

Source: The Adviser Report