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UNDERSTANDING CONFLICTS OF INTEREST
Plan sponsors, and the officers and managers and committee members who serve as fiduciaries, are obligated under ERISA’s fiduciary responsibility rules to:
1. Identify conflicts (or potential conflicts) that may impact the management of a plan;
2. Evaluate those conflicts and the impact they may have on the plan and its participants;
3. Determine whether the conflicts will adversely impact the plan;
4. Consider protections that would protect the plan and participants from any potential adverse effect of the conflict (for instance, appointing an independent fiduciary to evaluate the investment or proposed service provider) and;
5. If the conflict adversely impacts the plan and its participants, change service providers, investments or other circumstances related to the conflict.
Furthermore, if a conflict of interest is precluded under ERISA's prohibited transaction rules, the fiduciaries cannot, as a matter of law, allow the plan to become a party to the transaction – even if the action were otherwise reasonable or profitable to the plan.
Who does this pertain to?
The plan sponsor, individuals appointed to plan committees or otherwise designated to make plan decisions, directors who appoint plan fiduciaries, and officers and managers who have discretion over the selection of a plan’s service providers or investments are all fiduciaries under ERISA. Therefore, they are subject to the law’s fiduciary and prohibited transaction rules in their administrative decisions (such as selecting service providers) and investment decisions (such as selecting the investments for the plan).
How to Identify Potential Conflicts of Interest
The first step in avoiding conflicts of interest is to recognize them. That isn’t always easy. The best approach is for fiduciaries to ask themselves whether someone other than the participants benefits as a result of the selection of a service provider or an investment decision. If the answer is yes or possibly, then the conflict must be disclosed and evaluated.
Identifying Prohibited Transactions
Transactions between a plan and a party-in-interest:
ERISA §406(a) prohibits fiduciaries from enabling the plan to enter into certain transactions with “parties in interest.” Service providers are one type of person or company that ERISA refers to as “parties in interest.” Other parties in interest include other fiduciaries, plan accountants and attorneys, plan advisors or brokers, and the plan sponsor. Generally, §406(a) prohibits fiduciaries from allowing the plan to engage in certain transactions with the plan, including selling or leasing property, lending money or extending credit and transferring plan assets to a party in interest. Avoiding §406(a) prohibited transactions requires fiduciaries to understand who the parties in interest are and to investigate the benefits they might be receiving as the result of a plan transaction.
Fiduciary self-dealing:
ERISA §406(b) focuses on benefits the fiduciaries themselves receive. It prohibits fiduciaries from three basic types of conduct:
· Dealing with the assets of the plan for his own interest or for his own account.
· Acting adverse to the plan in a transaction involving the plan.
· Receiving consideration from a party dealing with the plan in a transaction involving plan assets.
§406(b) presents “a blanket prohibition” of certain transactions, no matter how fair.
Examples of potentially conflicted situations:
1. A bank offers a manufacturing company favorable business banking terms if the company transfers its retirement or 401(k) plan to the bank.
2. The retirement plan’s trustee buys and sells securities through a particular broker-dealer. The broker-dealer – using a portion of the commissions received from the purchase and sale transactions –pays for the trustee to attend investment strategy conferences in exotic locations.
3. A financial institution offers a fiduciary favorable mortgage terms on his personal residence if the company transfers its 401(k) services to the financial institution.
4. A law firm provides legal services for a trust company. During the course of the relationship, the trust company notifies the law firm that it prefers to send its legal work to law firms that maintain their 401(k) assets with the trust company. The law firm transfers its plan assets to the trust company.
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