Dave Walters, a partner from Bodman, and I led a rousing discussion on ERISA Accounts at the last meeting of the Great Lakes TEGE Council. It was an eye-opening discussion, with the Council members exploring a number of significant issues which many of us had not previously considered. Not only are there a number of ERISA rules to be considered, but our conversations also uncovered a few tax qualification rules as well.

"ERISA Account" is really not a defined term-anywhere-which is a problem in and of itself. So, for purposes of this piece, I refer to it as either an asset pool, or identifiable credits, that can be used at a plan’s direction for plan purposes.   It is interesting what happens when you take time to discuss things openly with other professionals; a lot gets flushed out.  One of the important things we discussed was the differences in ERISA Accounts depending on the funding source. Working the details of the ERISA Account really involves working the details of the underlying investment product.  

Just take just one iteration of how ERISA Accounts can be funded, 12b-1 fees from mutual funds, for example. Though plan assets are used to purchase investment company shares, the actual assets within the mutual fund are not considered plan assets because of very specific ERISA rules (the shares owned by the plan are actually the plan assets; the underlying investments of the mutual fund itself are not). The mutual fund is governed by a board of directors, which is responsible for adopting any 12b-1 program that the fund has, and the program determines whether or not such funds are even payable to a plan to fund an ERISA Account. Any 12b-1 fees are paid by the mutual fund itself, not by the investment manager of the fund or the rep selling/advising-on the fund (though those parties may, themselves, be able to create ERISA Accounts if done properly, but not from mutual fund assets).  Though these 12b-1 fees may be considered indirect compensation for 408b-2 purposes, and even though they may be subtracted from the fund’s value in determining the daily Net Asset Value of the shares held by the plan, the payment of the 12b-1 fee itself would not, generally be considered the payment of a plan asset.

One of the issues discussed was whether, if the plan had the legal right to that payment, whether that payment is a plan asset (or is the right to the payment an asset?).

If the 12b-1 payment is made to the plan’s trust, it is a plan asset. But what if, instead, it is paid directly to the TPA, who uses it to offset administrative costs under its contract with the plan? Is it a plan asset? What about the advisor, or the plan’s investment manager (particularly if it also manages the underlying mutual fund?).

This is just one example. Even within mutual funds, there are a variety of ways to handle the ERISA Account, and just wait until we discuss annuity contracts and collective trusts.  Determination of the plan asset status is just one of the issues (albeit a critical one) for any iteration of an ERISA Accounts, and we understand there is a pending DOL Advisory Opinion request somehow dealing with this sort of issue.  But then there are the questions of its accounting and treatment under the plan, the allocation issues, the forfeiture account issues, and even whether or not "definitely determinable benefit" becomes an issue if too much discretion on allocation is granted under the plan document. 

The only thing really clear is that there are a number of issues to resolve and, like prohibited transactions, the answers to them will lie in the specifics of the design of the ERISA Account; what type of entity funds it (and its relationship to fiduciaries and other parties in interest); how it is used; how it is terminated; what kind of contract commitment is involved; how is it documented and substantiated; how does it work in 403(b);  and others.

Whew. Here we go again……