Most of the litigation against 401(k) plans has focused on excessive fees and/or the poor quality of investment options within a plan. With the effective date of DOL’s new fiduciary standard and the Best Interests Contract exemption (BICE) coming in less than a year, a question that has been raised in some legal circles is whether BICE will provide yet another basis for actions against both plan sponsors and plans.
One of the reasons cited in support of the DOL’s fiduciary standard was the need to need the conflict of interest issue that allowed plan advisers to put their own financial interests first when dealing with a 401(k) and its participants. Various studies were cited reporting the adverse financial impact of such conflicts of interest on plan participants.
When the DOL introduced the new fiduciary standard, they also introduced the BICE concept. BICE focuses on the provision of investment advice to retiring plan participants with regard to potential rollover of their 401(k) funds to an individual retirement account (IRA). Advisers who can get potential clients to enter in a BICE agreement will then be allowed to offer investment recommendations that may provide the financial adviser greater financial incentives than other comparable investment options.
In principle, BICE would still require a financial adviser to put the client’s best interests first. From a legal perspective, a couple of obvious questions beg valid response. First. why would a plan participant agree to such an agreement that allows a financial to potentially engage in the same sort of abuse marketing and sales tactics that was the motivating factor behind the DOL’s new fiduciary standard? Why would a plan sponsor not protect their plan participants, many of whom may not be knowledgeable enough to protect themselves against such abusive marketing and sales practices, making the prohibition of soliciting such BICE agreements an express condition for any and contracts with third-party service providers?
It is the second question that may form the basis for new allegations of a plan sponsors’s breach of their ERISA fiduciary duties of loyalty and prudence. While some many may argue that a decision to enter into a BICE agreement is a private matter between a plan participant and a financial adviser and does not involve a plan, it is highly doubtful that the DOL and the courts will see the issue as that cut and dried given the stated importance of protecting workers as they try to provide for a meaningful retirement.
The potential liability issues become arguably even stronger given the relative ease with which protective measures could be implemented by plans and plan sponsors as part of the negotiating process with third-party vendors. There are those that will argue that given the strong penalties imposed for violating a BICE agreement, the chance of abusive sales and marketing is minimal.
With over twenty years of experience as a compliance attorney, I would suggest that that argument is extremely shortsighted. When BICE was first announced, my immediate reaction was variable annuities (VAs) and equity indexed/fixed indexed annuities (EIAs/FIAs).
According to the SEC and FINRA, variable annuities are among the leading grounds for customer complaints. In too many cases, VAs are structured to ensure a windfall for the issuing company at the VA owner’s expense, most notably by the use of a practice known as “inverse pricing” to assess the VAs annual M&E, or death benefit” fee. Moshe Milevsky’s landmark study of VA fees clearly established the abusive nature of such fees. Such conditions are a blatant violation of fiduciary law’s basic tenets of loyalty, prudence and equitable treatment, as “equity abhors a windfall.”
EIAs/FIAs are fixed income annuities that generally use a stock market index’s return to calculate the fixed annuity’s annual return. EIAs/FIs actually involve a solid and simple concept, were it not for the various restrictions and conditions that severely limit the actual returns an investor can receive.
Those restrictions and conditions are potentially confusing to investors since the marketing of such products usually relies on the potentially higher returns possible by using market returns to calculate the returns on EIAs/FIAs. BICE situations will also be susceptible to the same excessive fees and imprudent charges that the lawsuits typically allege today.
Greed has, and always be a motivating factor to some in any business. Given the chance that most investors are unfamiliar with securities law and ERISA standards, and that regulatory sanctions for BICE violations will require consumer complaints, unethical financial advisers may engage in abusive practices based on their belief that the odds of being exposed are low, especially since the repercussions for such violations would impact their broker-dealer on a far greater scale.
The legal community silently nodded their collective heads recently when the DOL publicly clarified that BICE would be available for insurance agent and insurance products. for many attorneys, this just reinforced their positions to focus on VAs and EIAs/FIAs as the primary product source of BICE related litigation. The question now is whether plans, plan sponsors and other plan fiduciaries will take an inexpensive, proactive stance to reduce their potential liability, namely conditioning their contractual relationships with all third parties on their agreement on an absolute prohibition on such third parties entering into BICE agreements with any of their employees, or whether plans, plan sponsors and other plan fiduciaries are willing to risk more multi-million dollar suits and settlements based on BICE issues. This should be interesting.
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This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.