I drafted the following article for the DCPI Weekly Exchange as part of an ongoing series of comments on fiduciary issues. DCPI's newsletter can be accessed (with a free subscription) at http://www.dcpinstitute.com.
As I review advisors’ websites and advisory agreements, I sometimes see “plan design consulting” as a service offered to retirement plan clients. While there is nothing inherently wrong with assisting clients with the design of their plans, I would caution that the DOL has long viewed such services as being materially different from other non-fiduciary activities.
Specifically, in a publication entitled “Guidance on Settlor v. Plan Expenses,” the DOL noted:
The department has taken the position that there is a class of activities which relates to the formation, rather than the management, of plans. These activities, generally referred to as settlor functions, include decisions relating to the formation, design and termination of plans and, except in the context of multi-employer plans, generally are not activities subject to Title I of ERISA. Expenses incurred in connection with settlor functions would not be reasonable expenses of a plan.
While the same publication claims that, “Plan design expenses clearly constitute settlor expenses and, therefore, are not payable by the plan,”[1] the basis for the DOL’s position is less than clear. In fact, the term “plan design” is never used in ERISA. Neither is “settlor expenses.” Instead, the DOL appears to draw support for its position from the law’s emanations and penumbras.
For example, in Advisory Opinion 97-03A, the DOL indicated its position was required, in part, by the following language in §403(c)(i):
(T)he assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.
In order to tie its position to this statute, the DOL must necessarily conclude employers do not form retirement plans “for the exclusive purpose of providing benefits to participants in the plan” but, instead, primarily to further their own interests. To be fair, our Supreme Court has opined that employers derive some incidental benefits by forming a retirement plan (e.g., in the recruitment and retention of employees).[2] Surprisingly, though, the DOL brushed aside any reliance on this argument, arguing that such incidental benefits are not sufficient to convert an activity into a “settlor expense.”[3]
As a result, advisors should be forgiven for not having a good understanding of when their advice becomes a “plan design expense” that cannot be paid from plan assets. The best guidance the DOL has offered in that regard is that, “Typically, plan design expenses are incurred in advance of the adoption of the plan or a plan amendment.”[4]
In other words, if your advice would require changes to the plan’s governing documents, it is likely a settlor expense that cannot be paid from plan assets. By contrast, if it relates to the implementation of the requirements set forth in those documents, then it is probably a proper plan expense.
As a result, the issue may be one of simple semantics. Specifically, if any portion of your fee will be derived from plan assets, your advisory agreement should not offer “plan design consulting,” “plan design audits,” or “plan design (anything else).” Instead, your services (whatever you decide to call them) should be limited to providing ideas for improving the implementation of the plan’s governing documents as opposed to suggesting changes to them.
If you do provide “plan design” services, they should be offered under a separate agreement in which the plan sponsor pays your compensation directly. However, even that may not be sufficient. Keep in mind that DOL considers “plan design” services to be settlor expenses, which are defined as activities primarily designed to benefit the employer. Taking this argument to its logical conclusion, there would seem to be an inherent conflict of interest if a plan fiduciary (who is required to act solely in the interests of the plan’s participants) is simultaneously performing settlor functions. As a result, there may be a risk in offering “plan design” services to the plan’s sponsor if you are already providing investment advice to the plan or its participants.
Finally, as always, I would caution practitioners to review their professional liability policies to ensure they have coverage for "plan design services." Because these policies are typically drafted for advisors and brokers who service retail investors and no FINRA license is required to consult on retirement plan design, your policy may not define this activity as a covered professional service.
[1] See “Guidance on Settlor vs. Plan Expenses.”
[2] See Lockheed Corp. v. Spink, 517 U.S. 882 (1996) and Hughes Aircraft Company v. Jacobson, 525 U.S. 432 (1999).
[3] See Footnote 2 in Advisory Opinion 01-01A.
[4] See “Guidance on Settlor vs. Plan Expenses.”
