Retirement plans’ sponsors and other fiduciaries associated with them got some reassuring news in early July when the U.S. Department of Labor stated in an advisory opinion that certain “revenue-sharing” fee payments by plan sponsors to their recordkeepers and other third-party administrators do not constitute plan assets for ERISA purposes.
This means that service providers can be confident they are not holding plan assets when they arrange to cover some plan expenses out of revenue-sharing payments received from third parties. Consistent with prior DOL guidance, when the plan itself does not receive actual revenue-sharing payments but instead gets credits calculated in relation to the service provider’s incoming fees, those fees also are not seen as plan assets, a designation that would trigger ERISA’s trust requirement and prohibited transaction restrictions.
It’s common for financial institutions that provide plan recordkeeping and other services to participant-directed defined contribution plans to receive payments from some of the investment options they offer participants. These payments, called “Rule 12b-1 fees,” shareholder or administrative service fees, are seen as part of the plan sponsor client’s fee payment to the recordkeeper. So the service provider may keep the revenue-sharing payments in its general asset accounts and get client plans to keep track of amounts received and credited to the plan, based on an agreed formula.
In the July 3 DOL response to Principal Life Insurance Co.’s question about classifying revenue-sharing payments as plan assets called DOL Adv. Op. 2013-03A, the agency said these frequently used arrangements made to pay for plan expenses such as accountants, actuaries or attorneys must not require the service provider to segregate any portion of the payments for the benefit of the plan, which could set off ERISA-prohibited transactions.
Previously, DOL had issued guidance on this topic in 2007, in the form of a Form 5500 revisions preamble clarification requested by Groom Law Group, the same law firm representing Principal in this July’s advisory opinion. But the firm said in a client bulletin issued after the latest advisory opinion that it had requested it “to confirm our view” that revenue-sharing payments received by plan service providers are not plan assets.
Applying its “ordinary notions of property rights” analysis, the firm wrote in the bulletin, DOL concluded that the payments to Principal described by the firm are not plan assets under ERISA — as long as the plan does not directly receive them. “Importantly, based on DOL’s analysis, any credits that are actually paid into the plan’s account would become plan assets once placed in the plan’s trust account,” the Groom Law Group bulletin continued.
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