I’ve had a number of responses to my “Timing and the ERISA Account” blog of last week: this topic seems to be front and center with a number of folks right now. Given the sorts of comments I received, I thought I’d expand a bit from that initial, almost cryptic, blog.

“ERISA Accounts,” or “Fee Recapture Accounts,” or “ERISA Budgets” are growing in popularity, and are becoming a frequent feature in the 401(k) and 403(b) space. They take two forms: a “credit” with the plan vendor, where the vendor pays up to a certain, agreed-upon amount for plan administrative services as part of the vendor ”package;’ or the “funded” sort where the vendor actually makes a cash payment to the plan, usually based on some sort of revenue sharing schedule. These typically include 12b-1 fees generated from mutual funds, but may also include such things as surrender charge reimbursements or other negotiated items.

In 2007, the ERISA Advisory Council’s Working Group on Fiduciary Responsibilities and Revenue Sharing Practices issued a report which did a nice job on lying out a number of key issues related to this practice. It also recommended that the DOL issue guidance regarding the treatment of revenue sharing received by a plan, specifically regarding the allocation of revenue sharing received by a plan. The DOL has had its hands full in the past few years, so it is little wonder that it has yet to act on providing this guidance.

There all sorts of issues which come up related to these accounts, but the most pressing of them appears to be associated with the funded accounts: the structure of these accounts within the plan (are they like forfeiture accounts?); the method of the allocation of those funds to participant accounts once expenses have been paid; and the timing of those allocations. My previous blog just addressed the timing issue.

The structure of these funded accounts is actually interesting: recordkeepers aren’t generally accustomed to establishing an employer level account, and many recordkeeping systems are not well suited for this function.  The employer level accounts that do exist are typically forfeiture accounts, and the rules governing them can differ from the ERISA Account-which also means that there are a number of different reasons you want to somehow account for ERISA Account deposits differently than forfeitures. These Accounts probably need to be adopted by some formal action of the plan’s fiduciary, in accordance with the authority it is (hopefully) granted in the plan document, which also discuss how they will be used and eventually allocated. Absent that, the general fiduciary authority within the document will need to be relied upon.

With regard to how these funds may be allocated to participant accounts (particularly where there is an “excess” left after certain plan expenses have been paid. Remember, at least in the funded accounts, they cannot be used for settlor expenses. There are interesting prohibited transaction issues as well if the unfunded credits are used for settlor functions), there seems to be a growing sense that ERISA requires that there be some sort of “matching up” of these allocations with the assets which generated them. There is little doubt that this could be an acceptable method of allocation, and there is at least one vendor which I know of which, very nicely,  closely tracks this.

What seems to be getting lost in the discussion related to these allocations is the fundamental rule that participants only have a beneficial interest in the plan. They have no right to any asset, and they only have the right to direct the investment of their accounts because the employer has decided to let them do so instead of the fiduciary. Any funds generated by those investments are due to the plan, not necessarily to any particular participant. Whatever allocation method is chosen by the fiduciary need only be prudently made. It is telling that in Field Assistance Bulletin 2006-01, the DOL stated that (in addressing the allocation of class action settlement proceeds):

“…. a fiduciary’s decision must satisfy the “solely in the interest of participants” standard of section 404(a)(1) of ERISA. In this regard, a method of allocation would not fail to be “solely in the interest of participants” merely because the selected method may be seen as disadvantaging some affected participants or groups of participants. In deciding on an allocation method, the plan fiduciary may properly weigh the competing interests of various participants or classes of plan participants (e.g., affected versus current participants) and the effects of the allocation method on those participants provided a rational basis exists for the selected method and such method is reasonable, fair and objective.”

In short, though “tying back” the ERISA Account payment to the participant account which generates them will generally be considered prudent (though I can see circumstances where it would not be, such as if it were expensive to do so), and can be a good "market differentiator" for a vendor, I think it is a mistake to claim that this is the result demanded by ERISA.

For all these Accounts, there are also a number of interesting 408(b)(2), Schedule C and Schedule A issues with which plan sponsors and vendors must cope-and which I will not address here.




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