DOL Issues Guidance on Plan Asset Status of Revenue Sharing Payments

The U.S. Department of Labor (DOL) recently issued guidance on whether accounts holding revenue sharing payments constitute “plan assets” under ERISA.  Prior to the issuance of the DOL guidance, it was unclear whether these amounts would be deemed to be ERISA plan assets.  If such amounts were treated as ERISA plan assets, they would be subject to various requirements under ERISA.  The DOL also addressed the responsibilities of plan fiduciaries in evaluating revenue sharing agreements.  Plan fiduciaries should review their current revenue sharing arrangements in light of the new DOL guidance.

The U.S. Department of Labor (DOL) recently issued guidance (Advisory Opinion 2013-03A) on whether an account holding revenue sharing payments holds “plan assets” under the Employee Retirement Income Security Act of 1974, as amended (ERISA).  The DOL also addressed the responsibilities of plan fiduciaries in evaluating revenue sharing arrangements.  Plan fiduciaries should review their current revenue sharing arrangements in light of this DOL guidance.

Background

Record-keepers for defined contribution plans often receive payments (revenue sharing) from investment funds offered through the record-keeper to its plan clients.  Revenue sharing payments consist of 12b-1 fees, shareholder and administrative services fees, or similar payments from investment fund companies.  Depending upon its agreement with the plan, the service provider may either retain such payments to be used as an offset to the administrative fees charged to the plan or enter a revenue sharing agreement in which it agrees to share all or a portion of the payments with the plan.  Under some arrangements, the revenue sharing payments are made directly to the plan.  Record-keepers refer to accounts holding revenue sharing payments by a variety of names, such as an ERISA budget account, fee credit account or fee recapture account (ERISA Account).  Prior to the issuance of this DOL guidance, it was unclear whether an ERISA Account would be deemed to hold “plan assets.”  If such amounts were treated as ERISA plan assets, they would be subject to ERISA’s trust, fiduciary and other requirements.    

DOL Guidance

The DOL Advisory Opinion addressed an arrangement under which the plan record-keeper retained the revenue sharing payments in its general accounts and maintained a bookkeeping record reflecting the credits owed to the plan under its record-keeping agreement.  The DOL opined that this ERISA Account did not hold ERISA plan assets, reasoning that the revenue sharing payments did not become assets of the plan until the plan actually received them.  However, the DOL stated that the contractual right to such payments is an intangible asset of the plan.  If the record-keeper were to fail to pay in accordance with the agreement, the plan would have a claim against the record-keeper for the amount owed to the plan. 

In contrast, revenue sharing payments made directly to a plan would constitute ERISA plan assets.  The DOL indicated that an ERISA Account will be deemed to hold plan assets when the revenue sharing payments are held in a separate account with a bank or third party in the name of the plan, or when it is specifically indicated in the revenue sharing agreement that separately maintained funds belong to the plan.  However, the mere segregation of the revenue for the ease of administration of the revenue sharing agreement alone will not result in the ERISA Account holding plan assets.  Thus, the Advisory Opinion gives comfort to service providers that they will not be holding plan assets when they make arrangements to cover plan expenses out of revenue sharing payments, if the revenue sharing agreement is structured correctly.

Fiduciary Obligations

The DOL reiterated the requirement that plan fiduciaries act prudently and in the best interests of plan participants when negotiating agreements with service providers, and ensure that the total compensation paid to the service provider, including any revenue sharing, is reasonable.  This determination must be an informed decision based on sufficient information about all fees and compensation received by the service provider. 

As applied to revenue sharing agreements, the plan fiduciary must understand the formula, methodology and assumptions used to determine the plan’s and service provider’s respective shares of any revenue generated from plan investments.  The fiduciary must monitor the arrangement and the service provider’s performance to ensure that the revenue owed to the plan is calculated correctly and that the amounts are applied properly (e.g., for payment of proper plan expenses, for reallocation to participants’ plan accounts).

Next Steps

Plan fiduciaries should carefully review any revenue sharing agreements to determine whether the revenue constitutes an ERISA plan asset and to ensure compliance with the relevant fiduciary obligations.  Among other things, plan fiduciaries should determine whether (i) the compensation paid to the record-keeper, including fee offsets from revenue sharing, is reasonable given the services provided to the plan; (ii) the plan is being credited with the correct revenue sharing amounts; and (iii) the revenue sharing payments are being applied as agreed with the record-keeper and as provided in the plan documents.