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SEP and SIMPLE IRA Plans and ERISA Fidelity Bonds

“Do SEP and SIMPLE IRA Plans Require an ERISA Fidelity Bond?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Florida is representative of a common inquiry related to savings incentive match plans for employees (SIMPLE) IRA plans and simplified employee pension (SEP) plans.

Highlights of Discussion

Generally, yes, but this is a great question with a multi-layered answer depending on the individuals and/or entities that handle the assets of these plans. ERISA Section 412 requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan be bonded in order to protect the assets of the plan against the risk of loss due to fraud or dishonesty. For this purpose, SEP and SIMPLE IRA plans are considered employee benefit plans. The DOL further explained (albeit somewhat vaguely) its position on the matter in Field Assistance Bulletin (FAB) 2008-4, Q&A 16. With regard to having a fidelity bond, the DOL states: “There is no specific exemption … for SEP or SIMPLE IRA retirement plans. Such plans are generally structured in such a way, however, that if any person does “handle” funds or other property of such plans that person will fall under one of ERISA’s financial institution exemptions” (See DOL Reg. §§ 2580.412-27 and 28).

The logic here is that, typically, employees establish their SIMPLE IRAs and SEP IRAs at banks, trust companies or insurance providers, and such institutions are exempt from the bonding requirement provided they are subject to supervision or examination by federal or state regulators and meet certain financial requirements. The Pension Protection Act added an exemption to the ERISA bonding requirement for entities registered as broker/dealers under the Securities Exchange Act of 1934 if the broker/dealer is subject to the fidelity bond requirements of a self-regulatory organization. Consequently, the employees of qualified financial institutions that hold SEP IRA and SIMPLE IRA plan assets need not be covered by an ERISA fidelity bond.

However, there is no exemption from the ERISA bonding requirement for the fiduciaries of employers who handle SEP and SIMPLE IRA plan assets prior to the assets being held in their respective IRAs. When do SEP and SIMPLE IRA contributions become plan assets? In the case of salary reduction (SAR) SEP and SIMPLE IRA employee salary deferrals, such amounts become plan assets as of the earliest date on which they can reasonably be segregated from the employer’s general assets (DOL Reg. 2510.3-102). In contrast, employer contributions generally become plan assets only when the contributions actually have been made to the plan (FAB 2008-01 and Advisory Opinion 1993-14A).

Court cases provide evidence that this is indeed how the DOL enforces the bonding requirement for SAR-SEP and SIMPLE IRA plans. In Chao v. Smith, Civil Action No. 1:06CV0051, the employer failed to remit employee contributions to a SIMPLE IRA plan. In addition to restoring the salary deferrals to the plan, as part of the settlement the employer was required to secure a fidelity bond and keep it active throughout the life of the plan “as required by the Employee Retirement Income Security Act.”  Similarly, in Chao v. Harman, Civil Action Number 4:07cv11772,  the DOL sued business executives and trustees of a firm’s SIMPLE IRA plan in Jackson, Michigan, for failing to forward employee contributions to workers’ accounts and obtain a fidelity bond. Finally, the DOL sued an employer with a SAR-SEP plan for mishandling of employee deferrals and lack of a fidelity bond (Chao v. Gary Raykhinshteyn, Civil Action No. 01-60056).

In each case, the DOL made a point to state employers with similar problems who are not yet the subject of an investigation may be eligible to participate in the DOL’s Voluntary Fiduciary Correction Program (VFCP) to correct the errors and avoid enforcement actions and civil penalties as well as any applicable excise taxes.

Since some form of employer contribution is required with a SIMPLE IRA plan, employers who fail to make these contributions have an IRS operational failure and may have the ability to correct the error by following the applicable provisions of the Employee Plans Compliance Resolution System in Revenue Procedure 2016-51.


While the DOL offers exemptions from the ERISA fidelity bonding requirement to qualified financial institutions that hold SEP and SIMPLE IRA assets, the agency requires employers who sponsor SEP or SIMPLE IRA plans and other plan fiduciaries who handle plan assets to be covered by an ERISA fidelity bond to prevent against loss as a result of fraud and/or dishonesty.


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Fiduciary Enforcement: A Camel’s Nose Under the Tent?

By W. Andrew Larson, CPC

Retirement Learning Center

We closed our eyes. We held our breath. June 9, 2017, came and passed, and the new Department of Labor (DOL) fiduciary rules for financial advisors became applicable, albeit subject to a relaxed transition period that runs through July 1, 2019. Gee, it didn’t seem so bad after all. Perhaps the new regulations aren’t the media event many of us made them out to be. Or is there more to the regulations than we realize that will lead to more serious and less desirable consequences down the line. Is there a camel putting its nose under the tent?

Clearly, the new regulations have resulted in broker-dealers implementing significant changes to their platforms, pricing, processes and products. These changes will have long-term effects for consumers, advisors and broker dealers. Originally, the concern over the regulations focused on the application of certain Employee Retirement Income Security Act (ERISA) rules to IRAs and rollover transactions. Under the new rules, previously commonplace transactions, such as recommending a rollover to an IRA, become a prohibited transaction and, potentially, subject to penalty unless an advisor follows an exclusion (e.g., providing education not advice) or the Best Interest Contract exemption (BICE) from the regulations. One immediate impact of these changes for advisors is increased oversight and the need for intensified documentation of IRA-related transactions—in particular—rollovers. One immediate impact on consumers seems to be reduced choice with their IRA accounts.

What about enforcement of the new rules? Well, according to DOL Field Assistance Bulletin No. 2017-02 and the DOL’s extension to the special transition period, until July 1, 2019, under a temporary enforcement policy, the DOL will not take any enforcement action against, “… fiduciaries who are working diligently and in good faith to comply with the fiduciary exemptions.” Likewise the IRS will not IRS will not apply § 4975 and related reporting obligations with respect to any transaction or agreement to which the DOL’s temporary enforcement policy applies. But, I am less concerned about the DOL and IRS, and their enforcement and reporting initiatives. The good news regarding federal-level initiatives, whatever they may be, is that they create a level playing field applicable to all players in essentially the same manner.

No, my concern with the new regulations is not at the federal level but rather at the state level. Under the regulations “state camels” may be placing their noses under the retirement tent. What could possibly go wrong? Before we explore the new state level issues let’s review the traditional ERISA and the Internal Revenue Code (IRC) enforcement environment.

The governance and control of retirement plans sits with the Federal government and courts. The DOL writes the rules for both retirement plans and IRAs. The DOL has enforcement authority over retirement plans under ERISA, and the IRS has enforcement authority over IRAs through the IRC. While there is no private right of action for IRAs, the IRC’s prohibited transaction provisions generally prohibit IRA fiduciaries from self-dealing, enforced through an excise tax.

The Federal venue offers several significant advantages. Federal law is uniformly applicable in all 50 states: One set of rules; one level playing field. In general, Federal rulings result in consistent interpretation (usually!) of the applicable laws. Next, Federal litigation is expensive. This means the issues brought forth are usually legitimate and not frivolous. Litigation occurs with significant issues when the plaintiffs believe they have a winnable case.

How are states able to become involved in retirement enforcement and litigation? Let’s examine how the regulations bring state courts into the retirement arena. Recall many IRA providers and advisors will utilize the BICE to avoid prohibited transactions. The BICE is a contract between the client (e.g., an IRA owner) and the advisor or other service provider. Contract law is based at the state level. Thus, if a plaintiff believes the advisor, provider, etc., has violated one or more elements of the BICE contract he or she can seek relief in state court. As the rule stands today, a BICE contract is enforceable under state law, and must provide for the right to sue in a class action.

And it gets worse. Each state’s contract law is unique. Much contract law is similar but not completely so. Thus, a BICE contract violation in one state may not be a BICE contract violation in another state. Theoretically, large retirement vendors will need to concern themselves with 50 sets of state ERISA BICE contract rules.

I would argue the States are not well versed in, nor facile with, the complexities of the Federal retirement regulatory environment. At a recent conference, one of the speakers was the official responsible for launching a state-run retirement program for small businesses. This state program requires most small businesses to offer a Roth IRA retirement program to employees. Again, this was an IRA-based program. I was, honestly, appalled at the official’s lack of insight and understanding of IRA programs, retirement plans and retirement regulations. Perhaps this is unfair of me, but I don’t see why states should commit resources to an area where the federal government and its agencies have done a credible job with enforcement and the protection of workers and their retirement benefits and rights. Another level of enforcement will simply increase costs that ultimately are paid by investors. I fail to see the benefit or the need for this new level of enforcement.

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Fiduciary Advisers

What is a 408(g) fiduciary adviser?

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Washington is representative of a common inquiry involving investment advice fiduciaries.

Highlights of discussion

  • “Fiduciary Advisers” may provide investment advice to qualified plan participants through an “eligible investment advice arrangement” that is based on a level-fee arrangement for the fiduciary adviser, a certified computer model or both [ERISA §408(g)].
  • A fiduciary adviser may also work with IRA owners as well.
  • Plan sponsors who engage a fiduciary adviser for their participants will not be responsible for the specific investment advice given, provided the adopting plan sponsors follow certain monitoring and disclosure rules. Plan sponsors are still responsible for the prudent selection and monitoring of the available investments under the plan and the fiduciary adviser.
  • The fiduciary adviser role is part of a statutory prohibited transaction exemption for the provision of investment advice that has been around since 2007, having been created by the Pension Protection Act of 2006 (PPA-06).  It has received very little attention over the years until now given the new emphasis on defining investment advice fiduciaries.
  • A fiduciary adviser could be a registered investment adviser, a broker-dealer, a trust department of a bank, or an insurance company.
  • To satisfy the exemption, a fiduciary adviser must provide written notification to plan fiduciaries that he/she intends to use an eligible investment advice arrangement that will be audited by an independent auditor on an annual basis. The fiduciary adviser must also give detailed written notices to plan participants regarding the advice arrangement before any advice is given.
  • Every year the eligible investment advice arrangement must be audited by a qualified independent auditor to verify that it meets the requirements. The auditor is required to issue a written report to the plan fiduciary that authorized the arrangement. If the report reveals noncompliance with the regulations, the fiduciary adviser must send a copy of the report to the Department of Labor (DOL). In both cases the report must identify the 1) fiduciary adviser, 2) type of arrangement, 3) eligible investment advice expert and date of the computer model certification (if applicable), and 4) findings of the auditor.


Under PPA-06, plan sponsors can authorize fiduciary advisers to offer investment advice to their plan participants and beneficiaries as part of an eligible investment advice arrangement.  Plan sponsors will not be held liable for the advice given by fiduciary advisers, provided all the requirements of the prohibited transaction exemption are met.

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Fiduciary Rule Transition

What New Disclosure is Required during the Fiduciary Rule Transition Period?

“Our firm will be following the Best Interest Contract Exemption (BICE) under the new investment advice fiduciary rules.  Our compliance department has provided a written notice of fiduciary status for us to use with our clients during the transition period that runs through December 31, 2017. Is this notice required?  

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • No, the written statement of fiduciary status is no longer required during the transition period. This is a recent change that was included in the regulation that delayed the applicability date of the new fiduciary rules to June 9, 2017 (DOL Reg. 2510.3-21).
  • The DOL changed the BICE and Principal Transaction Exemption transition period requirements, making adherence to the Impartial Conduct Standards1 during the transition period (June 9, 2017 through December 31, 2017) the only condition of compliance (removing the need to provide a written statement of fiduciary status as well as other requirements).
  • However, service providers to qualified plans may still be required to provide an updated service and fee disclosure under ERISA §408(b)(2) to reflect a change in fiduciary status as of June 9, 2017.
  • Pursuant to DOL Reg. § 2550.408b-2(c)(1)(iv), covered service providers to qualified retirement plans (e.g., 401(k) plans) who expect to receive at least $1,000 in direct or indirect compensation must provide plan fiduciaries with service and fee disclosures.  As part of the “408b-2” disclosure, service providers must include a statement of fiduciary status, if applicable [DOL Reg. § 2550.408b-2(c)(1)(iv)(B)].
  • Therefore, if a financial advisor’s status as a fiduciary to the plan changes as of the applicability date (June 9, 2017) of the investment advice fiduciary regulations, then he or she is required to provide an updated disclosure to the plan fiduciary reflecting the change in his or her fiduciary status.
  • The updated 408b-2 disclosure must be provided “as soon as practicable, but not later than 60 days from the date on which the covered service provider is informed of such change”  [DOL Reg. § 2550.408b-2(c)(1)(v)(B)]. Consequently, financial advisors should provide the notice by June 9, 2017 and no later than August 8, 2017.



Financial advisors should be aware that they may need to issue updated 408b-2 disclosures during the BICE and Principal Transaction Exemption transition period.



© 2017 Retirement Learning Center, LLC



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Possible Delay for Investment Advice Fiduciary Regulations

Will the DOL Investment Advice Fiduciary Rules Face a Regulatory Freeze?

“I heard there was memorandum issued from the White House that will freeze the DOL’s new investment advice fiduciary rules.  Is that true?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • It is true that the Assistant to the President and Chief of Staff, Reince Priebus, issued a memorandum on January 20, 2017, regarding managing the Federal regulatory process at the outset of the new Administration, including the possibility of temporary postponements for new and pending regulations.  What is unclear, however, is whether the directive will affect the yet-to-apply fiduciary rules.
  • The memorandum is specific to regulations that have not yet been published in the Federal Register, or have been published, but have not yet gone into effect. Neither condition applies in this case. The investment advice fiduciary rules were published in the Federal Register on April 8, 2016, took effect June 7, 2016, and will become applicable on June 9, 2017. Therefore, a purely technical reading of the memorandum would lead one to conclude that the fiduciary rules would not be subject to a postponement—at least under this guidance.
  • However, it is possible other guidance from the Administration and/or the DOL may be forthcoming that could delay the applicability of the fiduciary regulations.  For example, the DOL could follow the established rulemaking process (A Guide to the Rulemaking Process) and issue a notice of interim final rule to delay the applicability date.  The interim final rule would take effect immediately upon publication, but would be subject to possible changes after a public comment period of 30-60 days.
  • Much more to come.


Time is running short before the DOL’s new investment advice fiduciary regulations become applicable (June 9, 2017). Any directives to effect a further delay would have to be issued in the very near future.

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