On July 3, 2013 the Employee Benefits Security Administration issued ERISA Advisory Opinion 2013-03A http://www.dol.gov/ebsa/regs/AOs/ao2013-03a.html (the “AO”) to the Groom Law Group which had submitted a request on behalf of Principal Life Insurance Company (“Principal”). The primary question presented was whether revenue sharing payments received by record-keepers such as Principal are ERISA “plan assets.” If yes, a number of fiduciary protections would apply, including holding and protecting the assets in trust or a special account, penalties if the recipient engages in prohibited transactions and reporting of such amounts on Form 5500 as assets of the plan.
In the AO, it was explained that Principal receives various “revenue sharing payments” including mutual fund 12b-1 fees, shareholder service fees and administrative sub-record keeping fees from the investment options offered under retirement plans it services. As the revenue sharing arrangements are pursuant to contracts between Principal and the investment companies (and not between the investment companies and the plans), Principal retains all such payments. However, it was explained that under its normal practices, Principal maintains a bookkeeping account to track estimated revenue sharing amounts received and under arrangements with the plans, it allows a certain portion of these bookkeeping “credits” to be used to pay plan expenses, including accounting and audit fees, consulting fees, actuarial fees and attorney fees otherwise properly chargeable to the plans. It was noted that under arrangements with some plans, the bookkeeping credits are allowed to be allocated back into the plan for reallocation to participant accounts.
With respect to the question of whether the revenue sharing payments are ERISA plan assets, the EBSA responded That in this case they didn’t think so, but in other cases they may be. In their explanation, the EBSA said that under normal property law principles, such amounts could become plan assets if there was a contractual obligation between Principal and the plan sponsor to credit the amounts back to the plan or to segregate the amounts in a separate account with a bank or other third party in the name of the plan. Even if neither of these applied, the AO indicates that if a representation is made to plan participants (for example, in a fee disclosure statement or summary plan description), such amounts would be applied for the benefit of the plan, such a representation could create a beneficial interest in those payments which would make the payments plan assets. Under the facts presented by Principal lawyers, the EBSA was unwilling to issue a finding that the amounts received as revenue sharing payments are plan assets.
The AO did provide some additional guidance to retirement plan sponsors however. It reminds plan sponsors that they need to evaluate the covered service provider fee disclosures under ERISA Section 408(b)(2) to determine whether for the services provided, all direct and indirect compensation received by the service provider (such as Principal) is reasonable. Failure to do so could result in a prohibited transaction if the EBSA finds that the compensation is excessive and above market standards. In addition, EBSA warned that fiduciaries such as Principal could be found to be engaging in prohibited transactions and a fiduciary breach if they used their discretionary authority and influence to select investment options within a plan that would provide it with greater amounts of revenue sharing payments.
In light of this latest guidance, plan sponsors should review their fiduciary fee disclosures from their covered service providers to determine what revenue sharing payments are being made available from the investment options under the plan, who is receiving such payments and whether there are agreements in place with respect to any credits or available uses for such credits. To the extent that revenue sharing payments are being retained by consultants, third party administrators or trustees, the plans’ named fiduciaries need to consider whether those payments along with any direct fees are reasonable considering the services being provided by the recipient of the revenue sharing payments.