New Warning Cautions Plan Sponsors

The COVID-19 pandemic has had a significant impact on Atlanta area businesses. The forced business closures which triggered an immediate and unexpected drop in revenue to the challenges of reopening while cases surged across Georgia. New terms such as social distancing and personal protective equipment have become part of the daily conversation. Benefit plan sponsors have also had to react to the various changes implemented by the CARES Act such as increased participant loan limits, Coronavirus Related Distributions, and a waiver of Required Minimum Distributions (RMD) in 2020. Although helpful, the changes have required plans to modify how they operate, and in some cases, adopt new plan amendments to maintain ERISA compliance. It is against this backdrop the Securities & Exchange Commission (SEC) Office of Compliance & Examinations recently published an alert highlighting an increasing number of risks due to the COVID-19 market volatility. A primary concern for plan sponsors is the potential for financial conflicts of interest and excessive fees to help brokers make up for lost revenue during the shutdown. To help clients, prospects, and others Wilson Lewis has provided a summary of key details below.

SEC Risk Alert

The risk alert is a stark reminder to plan sponsors to carefully review and monitor both the investment advice received and related service fees. As mentioned above, there is concern that investment firms may place additional financial pressures on advisors to promote and sell investments that have the highest financial return for the firm, despite the availability of other options.

Financial Conflicts of Interest

• Recommending retirement plan rollovers to Individual Retirement Accounts (IRAs), workplace plan distributions, and retirement account transfers into advised accounts recommended by the firm.
• Making recommendations that result in higher costs to plan participants with greater compensation to the advisor. Examples of this include investments with termination fees that are switched to new investments with high up-front charges, or mutual funds with higher-cost share classes when lower options are available.

Excessive Fees

• Advisory fee calculation errors including valuations that may result in increased fees.
• Inaccurate calculations of tiered fees, including failure to provide breakpoints and aggregate household accounts.
• Failure to refund prepaid fees for terminated accounts

Protecting Plan Participants

There are a few steps that plan sponsors can take to ensure they have not been exposed to these risks. The first step is to review the accuracy of disclosures, fee and expense calculations and the investment valuations used when opportunities were provided. Concurrently, it is advised to identify transactions that resulted in high fees/expenses to plan participants, assess trends, and carefully review to ensure such transactions were in the best interest of participants.  

Contact Us

The challenges triggered by the COVID-19 pandemic continue to present themselves. The risk alert serves as a good reminder for plan sponsors to carefully evaluate transaction fees and investment advice to prevent such issues. If you have questions about the information outlined above or need assistance with another plan issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.