All posts by Justin Witz

Is the DOL Fiduciary Rule the End of Solicitor Arrangements?

Is the DOL Fiduciary Rule the End of Solicitor Arrangements?

David Witz post on eMoney Advisor

A solicitor arrangement is a common practice among financial advisers (FAs) who want to avoid fiduciary status but still receive compensation in exchange for a referral that results in a sale to a retirement investor. In some instances, the referring FA serves in any number of ongoing non-fiduciary roles such as a communication and/or education specialist, or vendor manager.

The structure has been widely marketed by many registered investment advisors (RIAs) who offer Employee Retirement Income Security Act (ERISA) Section 3(21) investment advisory or Section 3(38) discretionary investment management services to retirement plans through FAs as a distribution channel.

There are several primary reasons this collaborative effort has prospered in the past including:

  1. Fiduciary risk and liability for the FA is avoided.
  2. The referring FA does not need to become an RIA or IAR to receive compensation.
  3. The referring FA does not need to acquire fiduciary E&O.
  4. The referring FA can solicit IRA rollovers from the plan participants without engaging in a prohibited transaction.

Although the July 2012 changes to ERISA Section 408(b)(2) made the solicitor arrangement more complicated, it did not eliminate the structure as an ongoing solution. In fact, the 2012 changes to 408(b)(2) actually became the impetus to accelerate the continued proliferation of the solicitor model. Growth of this model is based on the assumption that an FA can recommend a client or prospect retain the services of an RIA without becoming a fiduciary. The industry has relied on the following section of the Regulation that defines the term “fiduciary”:

A person shall be deemed to be rendering “investment advice” to an employee benefit plan, within the meaning of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (the Act) and this paragraph, only if…Such person renders advice to the plan as to the value of securities or other property, or makes recommendation as to the advisability of investing in, purchasing, or selling securities or other property.  [Emphasis Added] 29 C.F.R. § 2510.3-21(c)(1)(i) (Oct 31, 1975)

Notice the Regulation does not state fiduciary status is tied to “advice to the plan as to the value of an RIA” or a “recommendation as to the advisability of investing with or through an RIA.” The focus of the Regulation is on advice rendered in regards to a “security” not an “RIA”. Of course, this has been debated and even litigated in a case involving investments made with Madoff but the popularity of the solicitor arrangement has continued to grow in reliance on this Regulation. Unfortunately, this approach is on life support with an imminent end in sight.

Effective April 10, 2017, the solicitor arrangement will no longer operate with the same benefits FAs have enjoyed in the past. Instead, any FA that refers an RIA to a retirement plan or IRA investor (i.e., a retirement investor) will become a fiduciary as that term is defined under ERISA. More specifically, any FA that refers an RIA to a retirement investor in exchange for compensation is a fiduciary. Of course, the referring FA’s liability is tied directly to the RIA recommendation not necessarily to the investments recommended or selected by the RIA. This also means the FA has an obligation to monitor the RIA to ensure the RIA continues to execute the investment mandate as promised. Should the FA fail to monitor the RIA, the FA could be liable for investment results should the RIA fail to execute its responsibilities prudently and according to the investment mandate. The liability associated with an FA recommendation is supported by the following wording found in the preamble:

“As amended the Regulation provides that a person renders investment advice with respect to assets of a plan or IRA if, among other things, the person provides, directly to a plan, a plan fiduciary, plan participant or beneficiary, IRA or IRA owner, the following types of advice, for a fee or other compensation, whether direct or indirect…A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services . . .[Emphasis added.] FR 21005 (April 8, 2016)

Bottom line, the new DOL Fiduciary Rule has not prohibited the solicitor structure, but the DOL has made a solicitor a fiduciary under ERISA; and as a fiduciary the solicitor now has more liability and responsibility. What impact this change will have on this popular structure one can only guess, and since I’m not bashful about guessing I will provide you with what my crystal ball suggests could happen to solicitors in the future in Part II of this blog, coming soon.

As printed in eMoney Blog.

Benchmarking – All About that Fee

Stealing a tag line from the new hit song “All About That Bass” this blog post outlines a practical approach to benchmarking fees in a manner that complies with ERISA 408(b)(2) fee disclosure. As you may recall, ERISA 408(b)(2) is designed to provide a responsible plan fiduciary (“RPF”) with sufficient information to determine if fees are reasonable and conflicts are avoided.

In general, the information a covered service provider (“CSP”) is obligated to provide a RPF includes their fiduciary status, a description of their services, and the fees charged for those services. This information provides the foundation for preparing a quantitative fee benchmarking assessment. Once this information is in hand, it can be loaded into a benchmarking database to run a comparative assessment. Databases with information on many different plans are better than ones that represent a single service provider platform.

For the results to be reliable, the plan must be benchmarked against other plans that are similar in size by plan assets and participant count. The more similar, the more accurate the benchmarking results. It is also best practices for a quantitative assessment to be accompanied by a subjective qualitative analysis from the perspective of the RPF. Complex plans with size advantages may be better off using benchmarking combined with a formal request for proposal (“RFP”) process to validate fee reasonableness.

The depth of your benchmarking report will impact your ability to draw reasonable conclusions about fee reasonableness. Failure to comprehensively consider services rendered, who pays for those services, and how those services are paid are all material elements of sound benchmarking. Taking short cuts in the collection and evaluation of pertinent data, subjects benchmarking results to criticism the process was imprudent. In short, this is one process that cannot be taken lightly.

However, implementing a proper process with appropriate documentation to support fiduciary procedural prudence protects both the plan sponsor and the CSP by preventing a plan from paying unreasonable fees and protecting a CSP from receiving less than reasonable fees for services rendered.

If you would like further information on how to ensure a retirement plan is paying reasonable fees or how to benchmark a plan’s fees, call or email me at 704-699-7031 or


Welcome to the FRA/PlanTools blog. The contributors to this blog will be David J.
Witz, Managing Director, Thomas E. Clark, Jr., Director of Fiduciary Oversight and
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