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gavel and money

Court Case Threatens Compensation Model for RPAs, Providers

The Bugielski case concerns whether the plan sponsor had a duty to consider the fee their record keeper received from a brokerage account and managed account provider.

ERISA has been mostly immune to case law with few lawsuits filed before Schlichter Bogard opened the floodgates in the mid 2000s. But it can take years before cases that go to trial make their way through the appellate process to define case law, which can dramatically change the way business is conducted, similar to new laws and regulations.

With so many lawsuits, it can be hard to keep up on what is important and how to adopt practices. The Ninth Circuit Court of Appeals’ Bugielski v. AT&T Services, Inc. case may be one to watch that covers how plan sponsors must monitor the activity and compensation of contracted vendors like record keepers and even advisors.

At issue in the Bugielski case was whether the plan sponsor had a duty to consider the compensation their record keeper received from a brokerage account and managed account provider. The plan sponsor argued they only had a duty to consider compensation received directly from plan assets while the plaintiff argued that all compensation received because of their position as a record keeper should be considered.

The court ruled in part:

“In short, to determine whether ‘no more than reasonable compensation is paid’ for a party in interest’s services, EBSA envisioned that a fiduciary would consider the compensation received by the party ‘from all sources in connection with the services it provides to a covered plan pursuant to’ the contract, not just the compensation the party receives directly from a plan.”

Even if disclosed, should indirect compensation be part of the determination of whether the fees paid are reasonable? ERISA fiduciaries have a duty of loyalty that implies the plan must be designed in the sole interest of the participants. Does that duty start and stop with direct compensation or should the plan also consider ancillary revenue that the record keeper or advisor receives from third parties like managed account providers or brokerage accounts as was the case in Bugielski.

John Nelson, a renowned NFP retirement plan advisor who is also an attorney, argues they should not partly because the plan sponsor cannot negotiate the fees and that only fees paid out of plan assets should be considered and that the Bugielski case creates a dangerous precedent only the U.S. Supreme Court can reverse.

The implications for the DC industry are significant as both record keepers and advisors search for additional revenue with direct plan level compensation greatly reduced over the past 10-20 years. Because record keepers are not considered fiduciaries, compensation paid out of plan assets do not have to be level but as most advisors that work with DC plans are or will be fiduciaries, especially if the new DOL Retirement Security Rule goes into effect, advisor compensation must be level.

Many record keepers have been able to reduce expenses and offer low cost share classes because they receive annual “stipends” from asset managers willing to pay the entry fee. Should those fees be considered when determining whether their compensation is reasonable? These hefty at times seven figure fees are squeezing out smaller providers who do not have the assets to demand similar compensation making their services and products seem more expensive.

Does the Bugielski precedent apply to the “platform” fees paid to advisory firms by record keepers and assets managers? Even if you could argue that the unlevel compensation received by fiduciary advisors for additional services or products they have created, private label or offer are okay with proper disclosure, which is dubious at best, Bugielski would imply that plan sponsors would have to consider all fees paid to an advisor because of their position to determine if they are reasonable. Do advisors disclose these payments?

Courts are quickly catching up to the other two branches of government, which have been very active with new laws like SECURE and new regulations like the Retirement Security Rule. The Bugielski case shows a proclivity by some courts to require plan fiduciaries to not only put the interest of participants ahead of their own, a theory being tested currently in five recent cases questioning whether forfeiture accounts can be used to reduce employer contributions, but for fiduciaries to protect participants who mostly cannot themselves.

Which puts RPAs in a powerful and crucial role unless they use that position to benefit themselves which can be very tempting but may not be tenable as courts like the Ninth Circuit take a more aggressive stance.


Fred Barstein is founder and CEO of TRAU, TPSU and 401kTV.

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