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DOL Issues Advisory Opinion on Revenue Sharing Payments as Plan Assets
Practical Law Legal Update 3-534-0007 (Approx. 6 pages)
DOL Issues Advisory Opinion on Revenue Sharing Payments as Plan Assets
by Practical Law Employee Benefits & Executive Compensation
The Department of Labor (DOL) issued Advisory Opinion 2013-03A regarding whether revenue sharing payments received by an employee benefit plan's service provider in connection with the plan's investments are considered plan assets under the Employee Retirement Income Security Act of 1974 (ERISA).
The DOL issued Advisory Opinion 2013-03A regarding whether revenue sharing payments received by an employee benefit plan's service provider in connection with the plan's investments are considered plan assets under ERISA. The DOL concludes that while it is possible that revenue sharing amounts received by the plan's service provider are assets of the plan, depending on the provider's arrangements and communications with the plan, nothing in the circumstances described in the Advisory Opinion require the DOL to conclude that the unsegregated revenue sharing payments recorded in the provider's bookkeeping account are plan assets before the plan actually receives them.
Facts
Principal Life Insurance Company (Principal) requested an advisory opinion from the DOL asking whether certain revenue sharing payments that it receives from third parties in connection with investments by employee benefit plans for which it acts as a service provider constitute "plan assets" under ERISA.
Principal provides recordkeeping and other administrative services to retirement plans subject to ERISA, including 401(k) and other participant-directed defined contribution plans and:
- Makes available to these plans a variety of investment options, which include its own insurance company separate accounts and affiliated (and unaffiliated) mutual funds. Principal receives revenue sharing payments from these investments in the form of Securities and Exchange Commission Rule 12b-1 fees, shareholder and administrative services fees and other similar payments (see Practice Note, Negotiating ERISA Service Provider Agreements: Special Fee Issues − 12b-1 Fees and Sub-Transfer Fees).
- Retains all of the revenue sharing payments but in some cases agrees with a plan to maintain a bookkeeping record of revenue sharing received in connection with the plan's investments. This account reflects credits to the plan calculated by reference to the estimated revenue sharing payments. By agreement or direction from a plan fiduciary, Principal applies these credits to pay certain plan expenses or to deposit certain amounts into the plan.
- Deposits the revenue sharing payments into its general assets accounts and does not establish a designated ERISA bank or custodial account to hold the revenue sharing payments. None of Principal's agreements with its client plans require Principal to segregate any portion of the revenue sharing payments for the benefit of the plan.
Plan Asset Analysis
The DOL concludes that it is possible that the revenue sharing payments received by Principal in connection with a client plan's investments are plan assets, depending on Principal's specific representations and communications with that plan. However, nothing in the facts described above would lead the DOL to conclude that the unsegregated revenue sharing payments recorded in Principal's bookkeeping account are assets of a client plan before that plan actually receives them.
In its analysis, the DOL first noted that ERISA does not specifically define plan assets and that its regulations identifying plan assets (see Practice Note, ERISA Plan Asset Rules) do not address this issue. Instead, the DOL relied on Advisory Opinion 94-31A, which identified ERISA plan assets on the basis of ordinary notions of property rights. Under this analysis, the assets of a client plan at issue generally include any property, tangible or intangible, in which the plan has a beneficial ownership interest.
The DOL reasoned that a mere bookkeeping entry relating to the revenue sharing payments, without segregation of assets for a client plan or specific representations made to the plan regarding those payments, does not constitute the ownership of a beneficial interest sufficient to constitute ERISA plan assets before the plan actually receives them. Notably, the DOL states that revenue sharing payments would generally be considered to be assets of an employee benefit plan contracting with a service provider (such as Principal) if:
- The payments are held in a trust on behalf of the plan.
- The payments are held in a separate account with a bank or third party in the name of the plan (such as an "ERISA Account").
- It is specifically indicated in the plan's agreement with the service provider that separately maintained funds belong to the plan.
The DOL further concludes that a plan's contractual right to receive the revenue sharing payments agreed to with Principal (or to have them applied to plan expenses) would be an asset of the plan and if Principal fails to pay the agreed upon amounts the plan would have a claim against Principal for those amounts, which itself would be considered a plan asset (see Practice Note, Negotiating ERISA Service Provider Agreements: Documenting Compensation and Fee Disclosures).
Presumably, under this analysis, a plan's contractual right to receive revenue sharing payments from a service provider means that the payments would generally become an asset of the plan on the date the plan receives the payment under the agreement with the provider (or on the date the provider agrees to pay the applicable plan expenses).
The DOL acknowledges that:
- The mere segregation of a service provider's funds to facilitate administration of its contract or agreement with a plan would not itself create a beneficial interest in those assets on behalf of the plan. This means that a service provider's use of a designated ERISA account to deposit revenue sharing payments for a plan does not in and of itself mean that the revenue sharing payments deposited in that account are plan assets at that time.
- This analysis also depends on whether an intent has been expressed or a representation has been made sufficient to lead plan participants and beneficiaries to reasonably believe that those revenue sharing payments separately secure the promised benefits or are otherwise plan assets.
ERISA Fiduciary Analysis
The DOL spends a significant amount of time discussing the ERISA fiduciary issues that may arise relating to revenue sharing arrangements that are not specifically within the original Advisory Opinion request.
The DOL notes that, regardless of whether the revenue sharing payments are plan assets, the arrangement between Principal and its client plans is subject to:
- ERISA Section 408(b)(2)'s requirement of a reasonable contract and arrangement for services that would otherwise be considered prohibited between a plan and a party in interest, such as Principal. Regulations issued under ERISA Section 408(b)(2) require that compensation and fee disclosures be documented and that no more than reasonable compensation to service providers is paid (see Practice Note, Service Provider Disclosure Requirements for Pension Plans).
- ERISA Section 406(b)'s prohibition against self-dealing, which is not exempted under ERISA Section 408(b)(2) (see Practice Note, Prohibited Transactions and Exemptions under ERISA and the IRC). The DOL states that if Principal were a fiduciary of one of its client plans and used its authority, control or responsibility as a fiduciary to cause the plan to invest in funds which paid Principal revenue sharing or other fees, a violation of ERISA Section 406(b) would occur.
- ERISA's general standards of fiduciary conduct (see Practice Note, ERISA Fiduciary Duties: Overview). The DOL states in this regard that the responsible plan fiduciaries must obtain sufficient information regarding all fees and other compensation Principal receives relating to plan investments to make an informed decision as to whether Principal's compensation from revenue sharing is reasonable.
In addition, the DOL states that prudence requires ERISA plan fiduciaries to, prior to entering into an agreement like this one with a service provider, understand the formula, methodology and assumptions used by the service provider in arriving at the amounts to be returned to the plan or used to pay plan service providers. Therefore, the DOL opines, before entering into this type of arrangement, the fiduciary should take into account its ability to oversee the service provider and monitor the provider's determinations under the revenue sharing formula.
Practical Implications
Fiduciaries of ERISA plans that enter into revenue sharing arrangements with their service providers should:
- Review the terms of those arrangements to ensure that they do not result in unpaid revenue sharing payments inadvertently being treated as ERISA plan assets (because, for example, an arrangement specifically segregates these assets in a separate account and contractually provides that these assets belong to the plan).
- Regardless of whether the revenue sharing payments are ERISA plan assets, ensure that they have enough information about the revenue sharing arrangement and the fees being paid to the plan's service provider from this arrangement to satisfy ERISA's fiduciary standards, including ERISA Section 408(b)(2).
- If the service provider is a fiduciary to the plan, evaluate whether the arrangement may violate ERISA Section 406(b).
- Ensure that they have sufficient information regarding the methodology or formula being used by the provider to credit revenue sharing payments to the plan or to pay expenses, including enough information to allow plan fiduciaries to prudently oversee the service provider's determinations under this formula.
End of Document
Resource ID 3-534-0007© 2024 Thomson Reuters. All rights reserved.
Published on 09-Jul-2013
Resource Type Legal update: archive
Jurisdiction
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