Plan Fiduciaries, Custodial Rules, and Employee Education

Employees, on the other hand, may not know that the advisors to the plan have duties to them as beneficiaries. Learning about those fiduciary duties could help employees feel more confident in the process involved in their retirement savings. It may also put them right to sleep if that education isn’t brief and blunt.

The news of Silicon Valley Bank’s liquidity crisis may have concerned those who had corporate bank accounts there. It may also have concerned companies that relied on SVB’s wealth planning and financial advisory services. Sponsors may be facing questions from plan participants concerned about their retirement accounts. Some of that hesitancy may be based on their lack of understanding of the various roles involved in administering a plan. It may also be based on a concern over what they perceive as market instability from this bank failure.

The DOL requires that employers segregate and transfer employee funds “as soon as it is reasonably possible to segregate them from the company’s assets, but no later than the 15th business day of the month following the payday.”[1] Where corporate business accounts are held in a financial institution with liquidity concerns, employees may be nervous about how those funds will transfer. DOL rules and decisions state that “when an employer fails to make a required contribution to a plan in accordance with the plan documents, the plan has a claim against the employer for the contribution, and that claim is an asset of the plan.” If bank liquidity issues delay transfer to the plan custodian, plan sponsors could have a compliance concern. Sponsors may want to consider how they monitor their own corporate accounts to ensure DOL rules can be met regarding segregation. And, while plan sponsors may want to consider their own relationship with their plan trustee and plan custodian (and whether those two roles should be based at the same institution), there is an additional ground for concern for sponsors: a new SEC rule concerning custodial accounts.

Plan sponsors may want to consider meeting with their plan compliance counsel to consider the overlap between the various fiduciary and administrative roles vendors play in their plan. Plans that have overlap between the administrators and plan custodians are often in the same corporation – which may cause issues if the custodian has a liquidity concern. Plan administrators, as trustees have to ensure the safety of the assets of the plan. But if a custodian is at a bank with potential liquidity concerns, transfers between trades could raise questions about the safety of assets.

This concern about the liminal space between trade and transfer is part of what motivated the SEC’s new proposed amendment to Rule 206(4)-2. However, the amendments may have some unintended consequences.

As the SEC spells out in its discussion of the proposed rule change, how advisors work with clients on new or changing assets may require a change to it’s rule. In the original version of the rule, first adopted in 1962, advisors “were required to segregate client securities and hold them in a ‘reasonably safe’ place.”[2] This was rule remained in place until it was amended 2003 when the SEC made clear that it applied to any investment adviser registered with the SEC  holding, possessing or having the authority to hold client assets. The 2003 amendments expanded the types of custodians that qualified under the rule and also required advisors to hold securities, not just funds, with the custodian. The 2009 amendments made further changes towards preventing the kinds of harms that Bernie Madoff and Allen Stanford did.

Normally, banks are not the kinds of custodians that this rule contemplates.[3] However, the changes to the new rule could extend the rule to banks as custodians. That extension could provide a compliance catastrophe according to some experts. “Without material changes to the proposal, a final rule would entail updating and repapering all the custodian relationships for the majority of the 15,000 SEC-registered investment advisers — essentially all advisers who provide any kind of portfolio management.”

In addition to considering how the SEC rule could impact their relationships with various administrators of the plan who may have some fiduciary responsibility, Sponsors may want to consider whether bank liquidity concerns may involve their fiduciary duties. For a review of fiduciary duties under ERISA, see our article on the various alphabet soup of plan players.[4]

In these considerations, Sponsors may want to consider their records. Advisors often lament that sponsors fail to recognize the “importance of the documentation of their actions …. How a retirement plan is ultimately judged comes down to process. Documentation supports the process you went through in making your decisions.”[5] Similarly, the IRS recommends that plan sponsors “periodically review your plan operations to ensure that you’re following the terms of your written plan.” That might include ensuring that “loans and distributions made according to your plan rules.”

Employees, on the other hand, may not know that the advisors to the plan have duties to them as beneficiaries. Learning about those fiduciary duties could help employees feel more confident in the process involved in their retirement savings. It may also put them right to sleep if that education isn’t brief and blunt. It may be that Plan Sponsors want to have an educational session with vendors, like the administrator, trustee or custodian to review the role of a fiduciary. That review may include their duties of prudence, diversification, direction (following plan guidance), managing expenses and loyalty (avoiding conflicts of interest).

Employees may also want to hear from the plan trustee about their oversight of the custodian, which may include how they review the custodian for liquidity concerns, and whether their review has tightened lately. Employees may be comforted by how a custodian performs their tasks and follows direction from the trustee. Knowing that the custodian may not move assets without direction from the trustee, who is legally obligated to operate in the best interests of the plan participants, may help employees who worry about their retirement assets where the custodian is a financial that seems small or midsized. Employees may also take comfort in the DOL’s view of a fiduciary. “Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.”[6]







These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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