We know that fiduciaries have a duty to ensure that compensation paid to those who provide services to the plan is reasonable – but what is compensation? And is it different under the Labor Department’s fiduciary regulation?
That’s the subject of ERISA attorney Fred Reish’s most recent blog post.
Reish explains that the Department of Labor partially answered that question in the fiduciary regulation, but simplifies it by noting that if an adviser makes a recommendation and receives money (or credits toward compensation, e.g., a bonus or a grid), that would be considered to be compensation – a concept that is referred to as the “but for” test. That is, “but for” the recommendation, would the adviser have received the compensation or have been entitled to greater compensation? Reish explains that this “but for” method is a long-standing approach used by the Department of Labor in evaluating whether a payment is compensatory.
But what if the payment is not monetary? What if it is non-cash – for example, gifts or trips or conference sponsorships or services? Here he turns to the 408(b)(2) regulation, which defined compensation as “anything of monetary value (for example, money, gifts, awards, and trips).” Moreover, he notes that the Best Interest Contract Exemption defines third-party payments as including “fees for seminars and educational programs; and any other compensation, consideration or financial benefit.”
In other words, Reish says, the definition of “compensation” is not limited to cash or similar payments. Instead, it includes any item of monetary value that directly or indirectly, partially or entirely, results from recommendations of investments or insurance or that is payment for advice.
