Complex Prohibited Transactions

Freedom and liberty are not merely themes sounded by politicians in political campaigns, or in rousing marches by military bands (though I am personally  particularly fond of them!), nor are they ideas which you will typically see being discussed in a piece about retirement issues. But they are themes woven into the fabric of our

I would think that it is a basic law of physics that, whenever you attempt to apply a number of different and complicated principles to a single object, that the consequences on that object will be hard to predict, or even readily ascertained.

So it is with a potential impact 408(b)(2) may have on many

 Generally unnoticed in the DOL’s proposed fiduciary reg was the implicit recognition that the commissioned based sales function is important to the operation of the market, and that you can “sell” until the cows come home (a good friend tells me, by the way, that the cows actually do eventually come home),  or until you become a fiduciary.  Anyone familiar with the successful salesperson knows that they are only able to sell once they establish a level of trust with the plan fiduciary, which is why trade organizations are taking the DOL to task on the requirement that the salesperson, in order to be recognized as not being a fiduciary, must then advise the fiduciary (with whom a relationship is being forged) that he or she may have adverse interests to the plan.

However that language is eventually finalized, it raises an important question that hasn’t really been addressed well, being a sort of red-haired stepchild of ERISA: Just what is “sales”and how are commissions treated? Finding your way through it can be trying, as if its a practice in ERISA metaphysics, mysticism and alchemy.

It starts with the basic question of whether or not “sales” is considered a service. It does seems almost metaphysical, and would be amusing if it didn’t have a very real impact.   Commissions from pure sales of an investment product to a plan from a party without an existing relationship to a plan (either on its own or through an affiliate) does not seem to be governed either by 408(b)(2) or by the prohibited transaction rules.  “Sales,” by itself does not seem to be a service covered by 408(b)(2), and the payment of a commission to a someone who is not a party of interest may raise fiduciary concerns if too much is paid, but it is NOT, in itself, a prohibited transaction.  But there are times where sales and the payment of commission may eventually be considered services, where there becomes an ongoing, supportive relationship.

Lets go over some “pure sales” scenarios, with the impact of “sales as service” perhaps being handled in a future blogs:


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The DOL’s newly delayed 408(b)(2) regs are particularly striking in that they demonstrate a growing sophistication, and efficiency, on the part of the EBSA staff in its approach to retirement plan financial products and services. The regs are short, by almost any measure of federal regulations, yet they are packed with meaningful rules which will apply in different ways to different product and services.  

The marketplace is a fast moving one, with complex instruments and services being used in new and unusual ways. Keeping up with this whirlwind is a challenge for the industry and employers, let alone a government regulatory agency which must somehow craft rules which have broad application to ever-shifting, complex and unanticipated circumstances.  Though not always successful, the DOL is approaching its learning curves impressively-including the way in which continues to seek to know and understand what it does not.

A prime example of this is the manner in which the 408b2 rules apply to variable investment accounts within the annuity contracts used to fund 403(b), 401(k) and other 401(a) plans. What is fascinating is that the word "annuity" only shows up with regard to IRAs;  the words "individual," "group," "variable," "fixed," "registered," or "non-registered"-all of which are descriptors of a variety of different sorts of annuity contracts- never show up; and the word "insurance" only appears once. Yet, it provides clear guidance on how these investment products are to be regulated. 

Lets take a quick look at the way the rules apply differently to registered variable annuity separate accounts (lets call these "Type 1" for purposes of this blog) typically used in the 403(b) market, and the way they apply to non-registered variable annuity separate accounts (which I’ll call "Type 2") typically used in 401(k) plans.

This, by the way, is important for plan sponsors to know because they have to sort out whether they are receiving the disclosures they need, and report it to the DOL if they are not.



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Lurking darkly in the background behind all the recent discussions of fee disclosure and how the prohibited transaction rules apply under 408(b)(2), is something most of us in the benefits world typically pay little attention to: the U.S. Criminal Code.

We all have a general knowledge that kickbacks and racketeering schemes of any sort are