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WASHINGTON (Reuters)—Regulators are more closely examining companies that serve employers' retirement plans, a sign that there may be harsher enforcement when new fee disclosure rules take effect this summer.
During the past 12 months, the U.S. Department of Labor has quietly ratcheted up its examinations of firms that serve retirement plans, including brokerage firms, registered investment advisers and third-party administrators, said attorneys representing these firms.
The Labor Department is examining how these companies get paid and whether their compensation poses a conflict of interest, they said.
A Labor Department spokesman confirmed the examinations and said the effort is part of bigger push by the agency to examine all areas of employee benefits, including health and welfare plans.
Several attorneys interviewed by Reuters each said that they have at least three retirement plan provider clients being examined by the Labor Department. They believe that the focus on service providers will intensify when the agency's fee disclosure rules take effect this summer.
"There are going to be a lot of complaints from employees who didn't know what they were paying," said Sheldon Smith, a member of the board of directors of the American Society of Pension Professionals and Actuaries. "For advisers, it's going to be a new world."
The exams have already led to at least one action over conflicted compensation. Last week, Morgan Keegan agreed to pay $634,000 to 10 retirement plans after an exam found the firm took kickbacks for selling hedge funds of funds.
Traditionally, the Labor Department has targeted only retirement plan sponsors with their investigations. But a recent spate of class action lawsuits over excessive fees and the agency's upcoming rules on fee disclosure have turned attention to the third parties that serve plans. Those rules will require providers to disclose fees to plan sponsors and plan sponsors to disclose fees to plan participants.
What's more, an agency rule on fiduciary duties that would weed out potential conflicts of interest in how 401(k) providers are paid has been delayed several times. Industry observers say it appears the Labor Department does not want to wait for a rule to weed out conflicts of interest and is instead trying to address these issues through investigations, which could lead to enforcement.
"This could be the agency's way of saying, 'Congress, we told you there was a problem, now look at all these instances where investors got ripped off,'" said Jason C. Roberts, chief executive of Pension Resources Institute, a retirement plan consultant, who has seen the agency become more aggressive with its examinations of brokerage firms and advisers in recent months.
The Labor Department has expressed concern that firms, such as brokerages and consultants, are receiving compensation that is not disclosed to 401(k) plans and, in some cases, the firms might be paid more to recommend specific investments.
Attorneys for service providers and plan sponsors said the Department's enforcement efforts ramped up only recently, even though in 2006 it announced a national enforcement initiative designed to hunt for undisclosed or improper payments to consultants and advisers.
The examinations are time-consuming and go beyond just the regulatory requirements, observers said.
For example, when the agency examined Brewster & Brewster, a Mentor, Ohio-based third-party retirement plan administrator that designs and maintains 401(k) plans for small businesses, it asked what the firm does with revenue share payments. It seemed a far-reaching question because Brewster & Brewster is allowed to receive such payments because it is not a fiduciary.
"It was clear that the examiner's position was that either we rebate it or we have lower fees for the clients," said Donna Brewster, president of Brewster & Brewster. The firm already refunds revenue share payments to clients, although that is not required.
For the firms, the exams typically take several months, resulting in tens of thousands of dollars lost, which is significant for small providers, attorneys said.
Lawyers for plans and plan providers believe that the exams could become more frequent and more time-consuming once the agency's fee disclosure regulations take effect.
"The bigger question... is whether this will lead to more aggressive enforcement," said Bradford Campbell, an attorney with Drinker Biddle & Reath and a former assistant director of the Labor Department's Employee Benefits Securities Administration.
WASHINGTON—Department of Labor rules spelling out permissible scenarios for giving investment advice to 401(k) and individual retirement account participants without violating prohibited transaction rules are now final.