In Advisory Opinion 2013-03A (http://www.dol.gov/ebsa/regs/AOs/ao2013-03a.html), the Department of Labor addresses what are commonly referred to as ERISA “budget accounts” or “fee recapture accounts.” In the Advisory Opinion, the DOL describes these accounts and discusses the plan asset and prohibited transaction issues related to them.
What is an ERISA Account?
ERISA accounts are accounts that contain revenue sharing payments (e.g., 12b-1 fees, shareholder and administrative service fees and similar payments) that plan service providers receive for providing investments to certain retirement plans covered by ERISA. In some cases, a service provider will agree with a plan to maintain a bookkeeping account of revenue sharing received in connection with plan investments. This bookkeeping account will reflect credits to the plan calculated by reference to the revenue sharing payments. Under an alternative arrangement, the service provider may deposit an amount into the plan account equal to the credits.
Are the Revenue Sharing Amounts Plan Assets?
If the service provider creates a bookkeeping account to reflect the credits, the bookkeeping account generally should not be considered a plan asset. However, if the plan has a contract with the service provider to pay specified plan expenses from the account, this contract right would be a plan asset. If the plan establishes a plan account to receive and hold revenue sharing payments from the service provider, these amounts would be plan assets.
Application of Prohibited Transaction Rules and Fiduciary Issues
These arrangements are subject to ERISA’s prohibited transaction rules. As the service provider is a party in interest to the plan in connection with these account arrangements, the arrangements must meet the conditions in Section 408(b)(2) of ERISA in order to be exempt arrangements (i.e., not prohibited transactions). Thus, the arrangements must be reasonable, necessary for the establishment and operation of the plan and provide no more than reasonable compensation for the services rendered.
In addition, general standards of fiduciary conduct apply to these arrangements.
Note also that the Advisory Opinion does not address any fiduciary issues that may arise from the allocation of revenue sharing among plan expenses or individual accounts or where the employer has the obligation to pay plan expenses.
The fees paid to the service providers pursuant to these arrangements should be disclosed in the fee disclosures provided by service providers pursuant to Section 408(b)(2) of ERISA.
Form 5500 Schedule C Reporting
FAQs published by the Department of Labor explain how to report these arrangements on Schedule C of the Form 5500. See http://www.dol.gov/ebsa/faqs/faq-sch-C-supplement.html.
Plan sponsors should review their services agreements to understand how their ERISA “budget account” or “fee recapture account” arrangements are structured. The Advisory Opinion makes clear that the way the services agreement terms are drafted impacts whether or not the accounts are plan assets. If the accounts are plan assets, they must be allocated in accordance with ERISA requirements.
In addition, plan sponsors should review and understand the terms of the arrangements to make sure that the fees paid in connection with the arrangements are reasonable.