Are advisors who are not parties in interest or ERISA fiduciaries liable if they knowingly participate in a prohibited transaction and receive compensation from plan assets? The 3rd U.S. Circuit Court of Appeals thinks so.
In the case at issue, employers had established a trust within an ERISA-covered welfare plan and would make tax-deductible contributions which would create tax-free, annuity-like payments for the employer’s owners after their retirement. The advisor had directed his plan clients into the scheme and received compensation from the administrative company that had set up the trust, which was compensated by the insurance policies that funded the plan.
On appeal, the 3rd Circuit (with jurisdiction in Delaware, New Jersey, and Pennsylvania) upheld the District Court’s ruling. The lower court had found that the advisor, who had not acted as an ERISA fiduciary in connection with the employers’ participation in the trusts, could be held liable for appropriate equitable relief as a non-fiduciary who had knowingly participated in a “violation of ERISA Section 406(b)(3), which prohibits a fiduciary from receiving consideration from a third party dealing with a plan in connection with a transaction involving plan assets.”
The appeals court rejected the advisor’s argument that “only non-fiduciaries who are “parties in interest” under ERISA’s prohibited transaction rules may be subject to liability for knowingly participating in a fiduciary’s breach.”
