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Will Referral Fees in DC Plans Survive?

Many benefit brokers, CPAs and even attorneys also receive referral fees, with some “accommodating” BDs set up just to help these unlicensed professionals get paid. But will these fees survive greater disclosure and the pending DOL fiduciary rule?

The best way for an advisor to get new clients is referrals from centers of influence (COIs), especially for advisors that don’t specialize in DC plans. That may become even more common if the DOL rule forces more advisors to be fiduciaries on the DC plan, and for health care brokers with the expected convergence of benefits at the workplace. It’s unreasonable to expect that a professional will provide referrals without getting something in return, nor does it make good business sense. But we’re talking about ERISA, which has the highest level of fiduciary responsibility and liability known to law in the world – remember that advisory fees are paid out of plan assets.

Referral fee arrangements raise the question of whether the payments charged are reasonable, especially if the referral fee is ongoing. Granted, the plan advisor may not be charging more on a referred plan than on their other plans, and benchmarking may even show that advisors fees are reasonable. But couldn’t the plan sponsor be concerned that the fees going to a non-functioning or contributing party paid out of plan assets are a problem even if they are paid out of the plan advisor’s share?

The alternatives? Limit the referral fee to the first year only, or pay a flat referral fee to the COI or other advisor not associated with the advisory fees charged. Plaintiff’s attorneys are scouring for big targets, and the rash of 401(k) lawsuits may lead some BDs, especially insurance BDs where referrals are common, to think twice about this practice.

Bottom line: Do ongoing referral fees pass the smell test?

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.