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.

Add Your Comments


  1. Steven Glasgow
    Posted March 25, 2016 at 10:31 am | Permalink

    I understand the elevated sense of concern given the tort bar’s over-zealous pursuit of anything that moves, but on reflection the existence of referral fees shouldn’t be a problem unless they cause an unreasonable expenditure of plan assets and that can be determined through competitive analysis.

    In the case where bench-marking reveals total plan fees are competitive, the mere existence of the referral expense on the adviser’s side doesn’t imply that the fee could or should be lower by the referral fee amount.

    In any fee, a professional must account for all their own operating expenses in order to provide services to their clients profitably…or they go out of business. Marketing represents a legitimate business expense for an adviser and it could be argued that such arrangements lower the overall cost of marketing for a practice.

    Of course, as many attorneys have said to me in different ways over the years – I can file a suit against you for shooting my elephant. The fact that I never owned an elephant cant stop a creative attorney from trying……

  2. url url'>Larry Kavanaugh
    Posted March 25, 2016 at 11:13 am | Permalink

    How many of those fee recipients have complied with 408b2?

  3. Fred Reish
    Posted March 25, 2016 at 1:10 pm | Permalink

    Fred, many of these arrangements should already be disclosed under 408(b)(2). Your article may suggest that the rule is commonly violated. I hope not.

    Also, as an attorney, and therefore a fiduciary under state law, I refer cases to others that I hold in high regard, but I don’t expect referral fees. But it’s more than that…under the rules of ethics I can’t accept those referral fees. As a fiduciary I can only have a duty of loyalty to my clients. Accepting those payments would be a conflict of interest.

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