The merger of health, wealth, and retirement. Accumulation and decumulation. Recordkeeper roll-ups. Advisor and consultant aggregator roll-ups. There is so much news in the benefit industry these days, but what is the common thread? Convergence.
To some, there is great value in bringing solutions, services and economies of scale together. To others, convergence is seen as a threat. So what does it mean from a legal perspective?
ERISA itself does not encourage or reject consolidation of services and service providers. In fact, whether you as an advisor are part of convergence with your own business or evaluating converged businesses for your clients, focusing on three basic ERISA concepts can help chart a course to legal compliance in today’s converging world.
Duty of Loyalty
If you are a fiduciary to your clients, you have a duty of loyalty to your clients with respect to your actions as a fiduciary. Whether or not a converged service provider is an ERISA fiduciary with respect to a particular action often depends on their contracts and the services they are offering. Furthermore, even if an offering is not in an ERISA capacity, loyalty can have many meanings beyond ERISA, whether as a registered investment advisor or under other applicable law. If you evaluate your or someone else’s converged service offerings through this lens, it may help provide a legal grounding for your evaluation and service development process.
Concept of Prudence
Is a service offering or your own service a prudent use of plan resources? While every offering varies, prudence is often viewed through a procedural lens. While some might make blanket statements of what is and is not prudent, ERISA is truly about process, and the number of crystal-clear prudent and imprudent decisions is limited. When overlaid with the concept of the duty of loyalty, proactively evaluating how your or some other converged service could be considered prudent and documented as prudent—either by you or an independent party—can help with legal compliance in a converged world.
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Prohibited Transactions
ERISA’s prohibited transaction rules default to making many transactions—such as certain payments to service providers and certain transactions between a plan fiduciary or party related to a plan—impermissible transactions that expose the parties involved to potential significant liability. However, there is a wide range of exemptions to these prohibited transaction rules, including:
- statutory exemptions, with ERISA section 408(b)(2)’s exemption for reasonable compensation for service providers;
- Department of Labor “class” exemptions providing relief for classes of activities and transactions; and
- individual exemptions obtained by specific people from the Department of Labor.
Importantly, in the land of prohibited transactions, disclosure does not always set you free. In a converged world, keeping these rules in mind can help avoid inadvertent foot faults and protect an advisor and its clients from future challenges stemming from more and more convergence.
Does this all seem basic? In some ways it is. At its core, ERISA can be boiled down to a few basic concepts. But the devil is always in the details. In a converged world, the details can often matter more than ever, but starting with a simple evaluation process and expanding outwards—whether with respect to your own business or in evaluating others’—can help chart a path to positive outcomes for your clients in an ERISA-compliant manner.
David N. Levine is a principal with Groom Law Group, Chartered, in Washington, DC. This column appears in the latest issue of NAPA Net the Magazine.
