United States: "Closing" Thoughts: Practical Tips For Service Providers In Winding Up A DOL Investigation

The Issue

The Department of Labor ("DOL") continues to investigate service providers to ERISA plans, including investment advisors, broker-dealers, recordkeepers and TPAs. Any money recovered for a plan (due to a fiduciary breach or prohibited transaction) may be subject to an additional 20% penalty if the recovery results from a settlement or a court order. Entering into a settlement agreement or becoming a defendant to litigation may also damage a provider's reputation.

The Solution

Providers who are being investigated by the DOL should work with knowledgeable attorneys to voluntarily comply with reasonable DOL requests. It is especially important to consult with experience ERISA lawyers before entering into a settlement agreement or litigation. The DOL's findings during an investigation may include purported violations—but a closer analysis would reveal that they are not in fact violations of ERISA. Even if there is a violation, it may be possible to negotiate the terms of the correction without incurring the 20% penalty.

Analysis

DOL investigations of investment advisers and broker-dealers (collectively, "advisors") are currently focused on identifying prohibited transactions under ERISA Section 406(b). These violations arise when a fiduciary advisor increases its compensation (or that of its affiliates) through its activities. Most typically, this occurs when an advisor recommends investment products to a plan that pay referral fees, revenue sharing or other indirect compensation to the advisor that are not offset against the fees the advisor would otherwise receive from the plan. The DOL also continues to investigate non-fiduciary providers such as recordkeepers and TPAs.

ERISA Section 502(l) provides that, when money is recovered on behalf of a plan due to a breach of ERISA's fiduciary standards or certain other violations (including prohibited transactions), a penalty of 20% of the "applicable recovery amount" (a "502(l) penalty") is assessed against a breaching fiduciary or other parties who knowingly participated in the violation. However, the "applicable recovery amount" is limited to funds that are recovered through a settlement or a court order.

To avoid 502(l) penalties, it is best to resolve issues informally with the DOL and not with a settlement agreement. However, providers should also work with legal counsel to ensure that all the DOL's findings of ERISA violations are accurate before agreeing to voluntarily comply. These issues are very fact-specific and can be legally complicated as well, so it is crucial to maintain an environment of cooperation while still defending the provider's rights. Even if a 502(l) penalty is assessed, the DOL may reduce the penalty under certain circumstances. In any case, avoiding litigation or a "formal settlement should help mitigate public damage to the provider's reputation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.