When Isn’t an Investment Provider an Investment Provider?

When isn’t an investment provider an investment provider?

Kind of a crazy question, but with regulators and lawsuits increasing every day, the answer is simple, when they are a retirement plan investment provider.

Yes, retirement plan investment providers must operate under SEC and/or FINRA. They must also take into consideration ERISA and understand it. Not only for their clients, the plan sponsor (and participants), but also for their own compliance.

Although this has always been true, PRIOR to September 5, 2006 when Schlichter, Bogard and Denton filed 5 lawsuits on one day, the regulators and lawyers didn’t pay close attention to providers or to plan sponsors for that matter. But that day changed the retirement plan industry – forever. It woke up the DOL and the retirement plan industry and it has not been the same since. Within one year there was §408(b)2 targeting service providers and §404(a)-5 targeting plan sponsors.

With §408(b)2, it was really the first time there was direct regulations targeting service providers. Of course, there are regulations for things such as trustee, §3(21) and §3(38), but nothing truly targeting providers like §408(b)2. This was the just the start of what was to come in this industry from both the regulators and the lawyers. Lawsuits had been filed prior to this September 5, 2006, but not like these. These targeted the plan sponsors in a new way and in mass. And the lawsuits haven’t stopped. In fact, they used to be just for the Fortune 500 type of plans, you know, $1 billion and over, but that isn’t the case anymore. And it’s not just Schlictner anymore. As more and more lawyers see they can earn six figure fees because of settlements, plans of all sizes are being sued.

Something that is often forgotten about ERISA is that it only takes one participant (plaintiff) to create a class action suit. Plans being sued are $15 million and $25 million. Larger than the average plan of about $7 million but closer to it than $1 billion.

There is a general perception in the industry that “not huge” plans won’t be targeted. Its argued there just “isn’t enough money” for lawyers to make. That was true, but over time, that is beginning to change.

And it’s also true, the real threat to the “not huge” plans come in terms of examinations. This doesn’t mean “not huge” plans are exempt and can rest easily that they are won’t be touched by a suit. Lawyers are becoming more creative with plans that have smaller asset sizes. They are looking outside of the plan sponsor to find liability. In PlanAdvisor’s article, “PANC 2019: Risk Management for Advisers”, Jamie Fleckner, partner with Goodwin Procter and Rhonda Prussack, senior vice president and head of fiduciary and employment practices liability at Berkshire Hathaway Specialty Insurance discuss that litigation is not stopping and in fact, investment providers are being added to the lawsuits.

For a Registered Investment Adviser firm or Broker/Dealer, this means going beyond complying with the SEC or FINRA. It means also making sure the reps and the firms are complying with and taking into consideration ERISA.

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