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Employers Cautioned to Examine Retirement Plan Service Provider Compensation

    Client Alerts
  • August 02, 2013

The U.S. Department of Labor recently advised Principal Life Insurance Company, a 401(k) service provider, that revenue sharing payments it receives from mutual fund companies do not constitute plan assets, which must be handled in accordance with ERISA's strict fiduciary standards. In addition, the ruling, designated as Advisory Opinion No. 2013-03A, served notice on employers that they, in accordance with their ERISA fiduciary duties, must review revenue sharing payments made to their retirement plan service providers to ensure that the amounts paid are reasonable. This obligation typically requires the retention of knowledgeable professionals to determine whether the compensation, including mutual fund revenue sharing fees, paid to the provider are reasonable.
Principal deposits the revenue sharing payments in its general assets but also keeps track of the amounts received with respect to each plan through bookkeeping entries. Principal has no agreements with plan sponsors requiring it to segregate any portion of the revenue sharing for the benefit of any plan or stating that revenue sharing payments will be set aside for the benefit or a plan or for payment of plan expenses. In accordance with agreements or direction from a plan fiduciary, Principal debits each bookkeeping account to reflect its payments of plan expenses, such as for services of accountants, consultants, actuaries or attorneys to the plan. Alternatively, Principal may agree to deposit an amount equal to the revenue sharing into a plan account, either periodically or on specified dates. Through these records, Principal can determine the net revenues it receives for providing services to each plan.
The DOL stated that the definition of what constitutes plan assets depends on ordinary notions of property rights. Given that no agreement, understanding or action suggested that Principal was restricted in how it spent the revenue sharing funds, there was no evidence that merely keeping track of the funds and the plan payments through a bookkeeping account made the revenue sharing funds assets of a plan before they were actually paid to the plan. If, on the other hand, a plan had a contractual right to receive these amounts or to have them applied to plan expenses, they would be plan assets.
The DOL stated that, regardless of whether the revenue sharing payments are plan assets, the arrangements between Principal and the plans whereby Principal receives revenue sharing funds are subject to ERISA's fiduciary rules. Because Principal is a party-in-interest with respect to the plans to which it provides service, plan sponsors, in their role as fiduciaries, must evaluate whether the compensation paid to Principal, both directly and indirectly, is no more than reasonable and otherwise satisfies the requirements for an exemption from a prohibited transaction for a service contract with a party-in-interest. Further, prior to entering into an agreement with Principal or any service provider, plan sponsors must understand the formula, methodologies and assumptions used by the service provider in paying plan expenses out of revenue sharing funds, must periodically monitor the service provider's actions, and must take into account their ability to oversee the service provider before entering into a contract with it.