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What Might 'Un-levelize' Level-fee Fiduciaries?

Having squared away the three meanings (past/present and future) of “level-fee fiduciary,” noted ERISA attorney Fred Reish looks at the kinds of payments or benefits that will “un-levelize” a level-fee fiduciary.

In a recent blog post, Reish notes that if an adviser ordinarily charges a level fee (for example, 1% per year) for non-discretionary investment advice or discretionary investment management for plans, participants or IRAs, and receives any additional benefits or payments attributable to those services, then the additional payments will un-levelize the adviser’s compensation and result in a prohibited transaction (unless, as noted in a previous post, if the payments or benefits are offset dollar-for-dollar).

Additional Compensation

What might constitute additional compensation? Well, in addition to commissions, 12b-1 fees, revenue sharing, and trailing commissions, Reish explains that it could include things like trips, gifts, awards, reimbursements, marketing support, conference registrations, and so on. In fact, the Labor Department pointed to some of those payments in its definition of third-party payments in the Best Interest Contract Exemption (BICE).

Reish goes on to explain that third-party payments include sales charges when not paid directly by the plan, participant or beneficiary account, or IRA; gross dealer concessions; revenue sharing payments; 12b–1 fees; distribution, solicitation or referral fees; volume-based fees; fees for seminars and educational programs; and any other compensation, consideration or financial benefit provided to the financial institution or an affiliate or related entity by a third party as a result of a transaction involving a plan, participant or beneficiary account, or IRA.

He notes that while advisers to retirement plans have, by and large, been aware of these rules, “my experience is that advisers who focus primarily on wealth management, including advice to IRAs, are not familiar with the rules.” To whom he directs his final comment – a reference to the 1980s TV series Hill Street Blues – “Be careful out there.”