So many advisors work with retirement plans and retirement investors but have little appreciation of the corresponding ERISA/Department of Labor prohibited transaction issues. I recently sat down with my colleague and our ERISA expert, Ryan Walter, to discuss the details.
Both the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code contain specific sets of prohibited transactions that apply when rendering services to ERISA plans and/or participants and IRA owners, respectively.
There are three enumerated prohibited transactions that apply to ERISA and IRC fiduciaries. To paraphrase these prohibited transactions applicable to ERISA and IRC fiduciaries:
1. Dealing with the assets of the plan in the fiduciary's own interest (referred to as the "Self-Dealing Provision");
2. The fiduciary acting in any transaction involving the plan on behalf of a party whose interests are adverse to the interests of the plan or its participants or beneficiaries; or,
3. Receiving any compensation for the fiduciary's own account from any party dealing with the plan in connection with a transaction involving the assets of the plan (the "Anti-Kickback Provision").
When an advisor provides a recommendation to an ERISA or IRA client, and that recommendation results in a direct or indirect increase in compensation to the advisor, the advisor should carefully consider whether the advice will constitute a prohibited transaction.
DOL Exemptions
The Labor Department, recognizing that the broad application of prohibited transaction rules would prohibit many common and beneficial industry practices, provides several prohibited transaction exemptions.
