ERISA attorney Fred Reish takes a look at a “new” concern that’s not so new: reasonable compensation for advice to IRAs.
In his most recent blog post, Reish explains that there seems to be a common misunderstanding about this issue, specifically that it will be difficult to determine reasonable compensation for IRAs because the rule is so new.
Reish reminds us that Code Section 4975(c)(1)(C) provides that the furnishing of services between a plan and a disqualified person is a prohibited transaction. However, Section 4975(d)(2) permits, as an exception to that general prohibition, “any contract, or reasonable arrangement, made with a disqualified person for … services necessary for the establishment or operation of a plan, if no more than reasonable compensation is paid therefor,” and noting that a “disqualified” person is defined as “a person providing services to the plan,” while a “plan” is defined as “an individual retirement account.”
“In other words,” Reish says, “the reasonable compensation limitation is not new. It’s been with us for decades.”
So why is it being treated as new? Reish says it has been ignored because only the IRS can enforce the rule, although it hasn’t done so. But now, in conjunction with the fiduciary rule, the Labor Department has issued two exemptions: 84-24 for life insurance policies and fixed rate annuities, and the Best Interest Contract (BIC) Exemption. Both exemptions — which are needed where prohibited compensation results from the investment or insurance recommendation — limit the adviser’s compensation for recommended investments and insurance products to no more than a reasonable amount.
So, Reish notes, while the law limiting the compensation of advisers (and financial institutions) is not new, the enforcement mechanism will be.
