To BICE Or Not To BICE, That Is the Question.

I read an interesting article today on LinkedIn Pulse entitled “401(k) Opportunity, Is That You ?” by Rebecca Hourihan. Ms. Hourihan addressed the same question that several of my plan sponsor fiduciary clients have asked me – what are the potential legal liability issues with allowing a plan service provider to enter into BICE agreements with a plan’s participants?

With all the articles and discussions regarding the DOL’s new fiduciary rule and BICE, I have not seen anything discussing the worst case scenario in a BICE situation. While one would like to think that the severe penalties for violating the rule and/or a BICE agreement would reduce the likelihood of same, it would be foolish not to recognize that there will undoubtedly be some violations of the rule and BICE.

There have numerous references made suggesting that the real parties that will benefit from the rule and BICE are class action attorneys since BICE preserves the right of an individual plan participant to participate in a class action based on a violation of the rule and/or BICE. I am among those who believe that there will also be legal actions against plan sponsors in cases of BICE violations based on breach of fiduciary claims, based on the argument that but for the plan sponsor hiring the service provider and allowing them to have access to the plan participants, resulting in the opportunity to obtain BICE agreements from plan participants, the damages suffered from the BICE violation would not have occurred.

Under the new fiduciary rule, plan sponsors have an opportunity for significant power in vetting potential service providers and establishing the terms of any engagement. They also have an increased liability exposure in connection with same. A potential violation of both the rule and BICE are certainly foreseeable. Therefore, one can legitimately ask why a plan sponsor would not require that a potential service provider agree not to ask plan participants to enter into a BICE agreement, since a BICE agreement essentially asks a plan participant to allow the service provider to engage in the very sort of abusive conflict-of-interest conduct that drove the passage of the rule and BICE.

Ms. Hourihan’s article made the point very clear with her simulated discussion:

Plan Sponsor: Are you working in my best interest?”
Advisor: “No, I’m using an exemption.”

And it’s just that simple. If a plan sponsor allows a service provider to seek BICE agreements from the plan’s participants and the service provider violates the BICE agreement, the individual will probably have to submit to arbitration with regard to any individual claim. Given the questions regarding the fairness of arbitration, it is highly unlikely that the plan participant will recover 100 percent of their loss, especially since attorneys fees will probably not be awarded, further reducing any recovery. Throw in possible discovery costs and other legally related expenses, and the seriousness in both the wrongful act and the plan sponsor’s culpability in not preventing same by prohibiting BICE agreement with the plan’s participants, and I believe you have the potential for a valid action against the plan sponsor.

Since most plan participants likely do not understand the implications of the new rule and BICE, a collateral issue is whether a plan sponsor has a fiduciary duty to explain both to plan participants so that they understand what their rights are with regard to both and the full implications of entering into a BICE agreement, that essentially they are giving the service provider/advisor the right engage in providing advice and recommendations that would otherwise be legally prohibited. Even if a plan sponsor attempts to educate plan participants on all of these issues, it is still possible that some plan participants still do not fully understand the issues and how they can protect themselves. In such cases, it can be anticipated that plan sponsors will be asked why they just did not take the proactive step of just conditioning the hiring of a service provider on their agreement not to seek BICE agreements from the plan’s participants.

I’m sure some will respond to this post with more negative comments about me and my fellow attorneys. Hopefully, some will seriously consider the points I’ve made, and other attorneys have already discussed nationally, and use them as potential “value added” ideas in marketing to plan sponsors and building their practices.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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