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ERISA Penalty Box
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Welcome to the ERISA Penalty Box

Welcome to the ERISA Penalty Box.  There is no denying that both 408(b)(2) and 404(a)(5) are industry game changers. The effective date of July 1, will be here before we know it and I think it is fair to say that many impacted parties including service providers, broker dealers, producers and plan sponsors are freaking out!  The only ones not freaking out at the moment are plan participants because they don’t know what is going on yet, but they will freak out come August 2012 when they see fees on their 401(k) statements.  We can count on this – according to a 2011 AARP survey 70% of plan participants think their plans are being managed for free and the remaining two thirds think their plan sponsors are paying the freight.  


ERISA Section 404(a)(5) and 408(b)(2), along with the changes to Form 5500 Schedule C effected in 2009, are part of a 3-pronged strategy imposed by the Department of Labor (DOL) to facilitate and enhance the exchange of information between service providers, plans sponsors, participants and the DOL. Their intent is to improve the disclosure of fees and any conflicts of interest, enabling plan sponsors to maintain reasonable fees and help plan participants make better informed investment decisions.  


Along with this sweeping regulatory reform comes unprecedented enforcement by the DOL, which has vowed to make aggressive enforcement a part of the current Administration’s agenda. New enforcers are in place, as is an estimated first-year budget of $153 million for review of the regulation and compliance reviews. And check this out - in 2011, EBSA closed 3,472 civil cases and obtained monetary results of $1.38 billion in fines for 401(k) plan non-compliance.  EBSA also closed 302 criminal cases that resulted in 129 individuals being indicted and 75 cases being closed with guilty pleas or convictions. This year the DOL is increasing the number of its enforcement personnel from 913 to 1,003.


ERISA compliance is important, because failure can result in serious penalties. Fiduciaries are subject to strict rules concerning prohibited transactions, and they bear personal liability for breaches. They can be subject to fines of 5% to 100% of the amount of losses incurred, as well as excise taxes, civil or criminal sanctions and even prison. The plan may be disqualified, resulting in the loss of favorable tax treatment for the plan sponsor as well as for plan participants and beneficiaries.


So let’s talk about the freak out factor.  Broker dealers are freaking out because prior to now, most have NO idea how many 401k plans they have under management, no written ERISA policies and procedures, no centralized account opening and management systems.  They don’t even know who to “tag and bag” for these required disclosures and are still struggling because producers can set up plans directly with mutual fund and insurance companies or with any TPA.  Plan level reporting didn’t even exist at the major clearing firms a year ago. Mutual fund, insurance provider and commission “plan level” reporting to broker dealers is either non existent or dismal at best. Registered Reps are freaking out because they need to provide descriptions of services where they never had to before and overcome disclosures that will say they can not provide investment advice etc., and need to create a new meaningful value proposition.  Most plan sponsors have no idea what a “service provider” is and have no understanding of the breadth and depth of the new requirements. Bottom line - people should be freaking out and preparing for the inevitable PARTICIPANT INQUISTION! 


No doubt we are going to see some action here and how we manage ERISA services is going to forever change.  After 20 years in the business I have to say I am looking forward to it.  Despite the chaos – I believe good things will come of this and increase opportunities.  This blog is dedicated to observing and discussing these changes as they come into play and we will be chatting with various industry experts along the way to study various perspectives – so let the games begin and lets get this conversation started  – WHAT ARE YOU FREAKING OUT ABOUT??








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