Skip to main content

You are here

Advertisement

Referral Fees in DC Plans and Fiduciary Duty

There’s a difference between being paid on a DC plan and actually managing a DC plan.

Consider the oft-cited statistics that of the 300,000 active financial advisors, 250,000 are being paid on a DC plan. It doesn’t mean that all 250,000 advisors are actively managing a plan; it means that many are getting paid because they referred the plan to another advisor.

One the best ways to get new DC clients is through referrals from other advisors and centers of influence (COIs). But many times, the referring advisor expects and gets a fee, sometimes an ongoing one. Some CPA firms and other COIs have at least one person licensed to receive fees and, even if the payment is called a “marketing fee,” isn’t the result the same? Is there a difference between a one-time fee and an ongoing referral fee?

This type of referral arrangement usually exists within a broker-dealer because of compliance issues for smaller plans where commissions are common. But what if an advisor is being paid from plan assets but is not adding any value — is the advisory fee reasonable? And what about referral fees to CPAs and attorneys, as well as benefit and P&C brokers?

Let’s look at the most obvious and perhaps egregious situation: where an advisor who is not focused on DC plans refers a client or contact to a plan advisor who wins the business, and in turn the winning advisor pays the referring advisor a percentage of the fees on an ongoing basis. What value does the referring advisor deliver to the DC plan and its participants? Are the fees paid to the plan advisor reasonable if a portion is paid to a non-functioning party?

The situation might be entirely different if the advisor is not paid out of plan assets. For example, if the employer pays the advisor directly and is notified that a portion of the fees will be paid to another advisor who is not working on the plan, then perhaps there is no fiduciary issue. And even if the fees are paid from plan assets, if the plan advisor is not acting as a fiduciary, is the situation any different?

In reality, most advisors will continue to get paid from plan assets and, under the pending DOL conflict-of-interest rule, most advisors will be acting as a plan fiduciary. The issue is whether fees are — or can be — reasonable if the plan advisor pays a portion of these fees on an ongoing basis to a third party who is not actively engaged in servicing that plan.

Advertisement