The U.S. Department of Labor (the “DOL”) recently issued Advisory Opinion 2013-03A (the “Opinion”), which addresses implications under the Employee Retirement Income Security Act of 1974 (“ERISA”) surrounding certain revenue-sharing payments. The Opinion was issued in response to an application filed on behalf of a certain insurance company (the “Applicant”), and relates to the Applicant's provision of various administrative services to “401(k)” and similar participant-directed retirement plans, and the affiliated and unaffiliated investment options made available by the Applicant. The Opinion addresses the Applicant’s receipt of revenue-sharing payments from the investment options (in the form of “12b-1” fees, service fees and similar payments).
The Applicant indicated that, although it retains the revenue-sharing payments, it may agree with a client plan to maintain a bookkeeping record that reflects credits to the plan calculated by reference to the estimated revenue-sharing payments. In accordance with such an agreement, or at the direction of a plan fiduciary, the Applicant will apply the credits to pay plan expenses, or may agree to deposit an amount equal to the credits into a plan account. No segregated or otherwise separate fund corresponding to the bookkeeping record is established.
If revenue-sharing amounts were considered “plan assets” of investing plans, a number of difficult ERISA issues could arise in those cases in which the provider and the plan agree that all or a portion of the revenue sharing will be for the account of the investing plan. Questions relating to the possible plan-assets characterization of revenue-sharing payments have been considered by practitioners for years.
In the Opinion, the DOL said that nothing in the circumstances presented by the Applicant would lead the DOL “to conclude that amounts recorded in the bookkeeping account as representing revenue sharing payments are assets of a client plan before the plan actually receives them.” The DOL generally stated that the plan’s contractual rights would be plan assets. (It is noted that, if and when the amounts are actually deposited into a plan account, they would generally be expected to become “plan assets” at that point.)
The DOL's approach may be helpful in the case of similarly situated providers, potentially helping to avoid a wide range of difficult technical issues that may have otherwise arisen under ERISA. In light of the Opinion, it may make sense for providers to review any arrangements surrounding the allocation of all or a portion of revenue sharing back to the investing plan, to see if the arrangements are consistent with those described in the Opinion. For example, in those cases in which all or a portion of the revenue sharing is agreed to be for the account of the investing plan, the provider may wish to review its arrangements (i) to confirm that, in accordance with a controlling agreement or at the direction of a plan fiduciary, (A) credits are applied to pay plan expenses or (B) amounts equal to the credits are deposited into a plan account, and (ii) to confirm that no segregated or otherwise separate fund is established in connection with any allocation of all or a portion of revenue sharing back to the investing plan.* In addition, providers and plan sponsors alike may wish to confirm that the underlying plan documents are consistent with the applicable revenue-sharing arrangements, and to consider whether the expenses in question are authorized for payment by the plan (and otherwise permitted to be paid by the plan under ERISA).