Source: http://wagnerlawgroup.blogspot.com/2013/
Timestamp: 2017-07-20 14:29:11
Document Index: 21067373

Matched Legal Cases: ['§2550', '§404', '§404', '§408', '§404', '§408']

Wagner Law Group Blog: 2013
Duty to Review Plan Expenses.
Revenue sharing payments, such as 12b-1 and sub-transfer agency fees, are paid
by mutual funds to 401(k) plan service providers to compensate them for
services undertaken on behalf of plans. For example, a plan recordkeeper may
receive sub-transfer agency fees to track participant-level ownership of
shares. The DOL has recognized that such payments can improve efficiency and
reduce the cost of administrative services. At the same time, the complexity of revenue sharing practices contributes
to the need for the plan-level fee information required by recently effective
regulations. Among other things, these regulations are intended to give plan
sponsors the tools to oversee revenue sharing and ensure that plans do not pay
excessive amounts for services as a result of such indirect payments.
Levelizing Provider Compensation
through ERISA Accounts. One of the strategies developed by recordkeepers to
assist plan sponsors in this regard is the so-called ERISA account (sometimes
referred to as an ERISA budget or an ERISA expense account). Where such an
account is used, some or all of the revenue sharing allocated to a plan may be
used to compensate a plan service provider, such as the recordkeeper itself or
the provider of accounting, advisory or third party administrator services. From
a recordkeeper's perspective, this approach ensures that the recordkeeper's
compensation will not exceed the fee stated in its plan contract. Because the
recordkeeper does not retain revenue sharing payments for its own benefit, its
compensation remains level which eliminates its incentive to steer plan clients
to investment options with high revenue sharing.
In one version of this technique, revenue
sharing dollars are paid to a plan account and are part of plan assets. If the
account is not zeroed out at the end of the year by payments to service
providers, the plan allocates the remainder to participants in order to comply
with the IRS requirement that all plan assets be fully allocated to participant
An alternative version of the ERISA account
(sometimes referred to as a pension expense reimbursement account or PERA),
requires revenue sharing to be credited to a hypothetical bookkeeping account
maintained by the recordkeeper. Under this arrangement, the actual dollars
remain with the recordkeeper as part of its general assets and do not belong to
the plan. The plan may, however, direct the recordkeeper to use the assets (up
to the credited amount) in a number of ways, as specified by its agreement with
the recordkeeper, including the compensation of plan providers. This type of
account carries over from year to year; however, if the plan discontinues the
services of the recordkeeper, the account may be forfeited in which case the
recordkeeper retains the remaining revenue sharing payments that generated the
The Plan Asset Question. In Advisory Opinion
2013-03A, the DOL recently issued guidance to Principal Life Insurance Company
clarifying the application of plan asset rules to a PERA-type arrangement. The
issue is important, because if revenue sharing payments held by a recordkeeper
are treated as plan assets before being applied for the benefit of the plan or
its participants, there would be a violation of ERISA's requirement that all
plan assets be segregated and held in a plan's trust. Moreover, possession of
plan assets would confer fiduciary status on the recordkeeper holding them and,
as a result, the recordkeeper would engage in a fiduciary breach as well as
violate the prohibited transaction rules by commingling the revenue sharing
moneys with its own assets.
The new advisory opinion's analysis of what
constitutes plan assets begins with the observation that "the assets of an
employee benefit plan generally are to be identified on the basis of ordinary
notions of property rights." This breaks no new ground, since numerous DOL
advisory opinions have previously made this point. The new opinion goes on to
note that plan assets generally include any property in which a plan has a
beneficial ownership interest and that to determine whether such an interest exists
requires consideration of any contracts or legal instruments involving the
plan, as well as the actions and representations of the parties involved with
the ERISA account.
Thus, according to the opinion, the requisite
beneficial interest generally arises if particular assets are held in trust on
behalf of the plan, or in a separate account in the plan's name with a third
party, such as a bank. In addition, the plan would have a beneficial interest
in an ERISA account maintained by a recordkeeper if a document or legal
instrument indicates that the funds in that account belong to the plan. The new
opinion also indicates that a plan could have a beneficial interest in an ERISA
account if an intent has been expressed (presumably by the recordkeeper or other
party holding revenue sharing funds, although the opinion does not say) to
grant such an interest to the plan. Moreover, a representation (again,
presumably by the recordkeeper or other service provider) sufficient to lead
plan participants and beneficiaries reasonably to believe that revenue sharing
funds separately secure promised benefits would create the beneficial interest
that turns those funds into plan assets.
On the other hand, the opinion notes that the
mere segregation of a service provider's funds to facilitate the administration
of its service contract with a plan would not in itself create a beneficial
interest in the segregated assets on behalf of the plan. Thus, merely crediting
revenue sharing payments to an ERISA account maintained by a recordkeeper,
without more, should not create a beneficial interest in the plan.
In the case of Principal Life, to which
Advisory Opinion 2013-03A was addressed, the DOL noted that Principal's
arrangements and communications with each plan from whose investments Principal
received revenue sharing could potentially lead to the conclusion that such
amounts are plan assets. Advisory opinions do not attempt to resolve such
factual questions, so that Principal could not have expected to receive an
ironclad guaranty that the revenue sharing amounts in its possession are not
plan assets. It did, however, receive assurance that the DOL saw nothing in the
typical PERA arrangement presented by Principal which would lead it "to
conclude that amounts recorded in the bookkeeping account as representing
revenue sharing payments are assets of a client plan before the plan actually
receives them." Thus, the new guidance does not seem to require changes to
the standard PERA arrangement.
Caveats. Advisory Opinion 2013-03A makes
several observations as to the obligations of plan fiduciaries with respect to
an ERISA expense account. First, the client plan's contractual right to receive
payments (or have such payments applied to plan expenses) under the arrangement
would be a plan asset. If a recordkeeper or other service provider fails to
make a required payment under the arrangement, the plan would have a claim
against the service provider that would itself be a plan asset.
Since the contractual arrangement that underlies
an ERISA account is a plan asset, plan fiduciaries must act prudently in
negotiating the specific formula and methodology under which revenue sharing
will be credited to the plan and paid back to the plan or to its service
providers. The new opinion indicates that the plan fiduciary must understand
the formula, methodology and assumptions to be used by the service provider in
implementing the ERISA account. The plan fiduciary should also be capable of
monitoring the service provider's performance under the ERISA account
arrangement to ensure that amounts payable to the plan are correctly calculated
and applied for the plan's benefit. The implication appears to be that if the
plan fiduciaries do not have the capability to oversee the service provider's implementation
of the ERISA account, the plan should not enter such an arrangement.
Plan sponsors have certain obligations to monitor and negotiate
fees associated with their 401(k) plans. Plan sponsors should be able to
demonstrate they have undergone a suitability analysis and made a determination
that the cost of their plan is reasonable in relation to the value of services
received by the plan. If you have not done this analysis recently, now
Plan cost review: Plan sponsors need to clearly identify and
review all of the various services to the plan and what the plan is paying for
such services (including any revenue share from investments). To do this
plan sponsors need answers to the following questions: What are the
different fees and services? Schedule C of your Plan's most recently
filed Form 5500 lists the plan's services providers and, for many service
providers, the services provided and the fee paid for the services. Each service provider's service contract and/or fee disclosure should be
reviewed for more specificity. By knowing who is providing the
service, the cost of the service and the source of the fee payments, plan
sponsors can begin to get a handle on cost and on whether the cost is
reasonable in relation to the service provided.
Was a benchmark
used to measure reasonableness and is it appropriate? Were current
service providers selected as a result of a vendor search? Were
current service providers' fees compared to other service providers
servicing 401(k) plans similar in size to yours? Knowing the market,
service providers and industry tools available to determine the
appropriate benchmarks against which you can measure your plan's services
and expenses is a must.
exist, if any, with the plan's service providers? Plan sponsors
often rely primarily on information provided by their service providers as
to the reasonableness of services, investment options, and fees. However, plan sponsors must remember service providers may have a
commercial, not a "co-fiduciary", relationship with the plan
and, thus, may not be impartial. Accordingly, it is important to
know who shares in direct and indirect revenue from plan assets or
receives revenue (from another source) due to a relationship with the
plan. Does the relationship between the payer and payee give them
the ability to affect their own compensation or that of an affiliate
without your approval? Did an advisor have a material financial,
referral or other relationship or arrangement with a money manager, broker,
or other entity that may create a conflict of interest in performing
services for your plan? Are the services
provided and their fees the result of due diligence? Has the plan
leveraged its bargaining power, if any, to acquire, when able, lower cost
funds or services for the plan? When was the last time the plan
sought a request for proposal ("RFP") to determine what other
service providers might provide in terms of services and cost? It's still all about the process. As has always been the
case, a plan sponsor's potential liability lies not in the outcome of the
decisions made, but in the decision process itself. Plan sponsors must be
prepared to support their internal decision making, especially on matters
involving the reasonableness of plan cost. By asking who is providing services,
what services they provide, how they are being paid and from where and to whom
the money flows, plan sponsors can begin to get a handle on exactly what is the
cost of their plan and answer the most important fiduciary question of all,
which is not, is the Plan the absolute lowest dollar cost plan on the market,
but rather, is the value the plan receives for its cost reasonable. If it
is not reasonable, the plan sponsor must take action to reduce the plan's cost.
The Wagner Law Group is available to assist you with any questions
you have regarding retirement and benefit matters, including reviewing plan
services and cost or assisting with RFPs to gauge the market position of your
The Department of Labor, in Field Assistance Bulletin
("FAB") No. 2013-02[1] released
July 22, 2013, has provided plan sponsors and their service providers with
flexibility on when they need to give participants in participant-directed
individual account plans (e.g., 401(k) plans) the second annual fee disclosure
notice (the "Notice") due under 29 CFR §2550.404a-5
("§404a-5").
§404a-5 requires plan sponsors to communicate the following
information to plan participants and plan beneficiaries:
investment information including a
comparative chart; and
fee information. The Notice was originally required to be provided no later than 60
days after the effective date of the §408(b)(2) regulations (i.e., July 1,
2012)[2] which
meant plan sponsors had until August 30, 2012 to provide the initial Notice to
participants. Thereafter, a Notice was required "at least once
in any 12 month period" without regard to whether the plan is a calendar
or fiscal year plan. Accordingly, with the first anniversary of the initial August 30,
2012 date fast approaching, plan sponsors needed to determine if, to
comply with the "at least once in any 12 month period" requirement, a
subsequent Notice was due by August 30, 2013. However, thanks to FAB 2013-02, plan sponsors can now provide the
second Notice no later than 18 months from the date of the initial
Notice. The extension is meant to allow Plan Sponsors to send the Notice at a time that will benefit participants (e.g., by
reducing administrative costs or by providing the information at a more
relevant time such as open enrollment) or to align it with other participant
notices typically made either just before or just after the beginning of a plan
year. For example, if a plan sponsor who provided the initial Notice on
August 25, 2012 believes providing the Notice on a different twelve-month cycle
would be more meaningful, it can provide the second Notice no later than
February 25, 2014. Thereafter, Notices would be due once in the 12 month period
measured from the date the second Notice is provided and anniversaries thereof. The one-time election to delay the Notice for up to 18 months also
applies to a plan sponsor who timely furnished the first Notice and has
furnished the second Notice already. Under the FAB, this plan sponsor
could provide its next Notice (the 2014 Notice) no later than 18 months from
the date of the second Notice. This gives everyone the same opportunity
for a one-time "re-set" of the timing for their annual Notice. If you have any questions on FAB 2013-02, the Notice requirements
or your obligations as a plan sponsor or plan administrator, please give us a
call at 617-357-5200. [1] The full
text of the FAB can be found here: http://www.dol.gov/ebsa/regs/fab2013-2.html.
[2] The DOL amended its §404(a)(5) regulations at 76 Fed. Reg. 42539 (July
19, 2011) to postpone the effective date of the disclosure requirements until
at least 60 days after the effective date of the §408(b)(2) regulations. Posted by
ERISA Accounts Meet Plan Asset Rules in New DOL Gu...