Based on the facts presented for the Advisory Opinion on behalf of Principal Life Insurance Company, the DOL determined the revenue sharing amounts received by Principal are not plan assets. In a client memo, Groom Law Group, which requested the Advisory Opinion, said: “The identification of ‘plan assets’ is critical under ERISA, because the existence of ‘plan assets’ not only triggers ERISA’s trust requirement and prohibited transaction restrictions, but they also help identify the plan’s fiduciaries.”
Applying ordinary notions of property rights, the agency noted that assets of a plan generally include any property, tangible or intangible, in which the plan has a beneficial ownership interest. According to the Advisory Opinion, a plan generally will have a beneficial interest in particular assets if the assets are held in a trust on behalf of the plan, or in a separate account with a bank or other third party in the name of the plan, or if it is specifically indicated in documents or instruments governing the arrangement that separately maintained funds belong to the plan. Similarly, whether a plan has acquired a beneficial interest in specific assets also depends on whether an intent has been expressed to grant such a beneficial interest or a representation has been made sufficient to lead participants and beneficiaries of the plan to reasonably believe that such funds separately secure the promised benefits or are otherwise plan assets. The mere segregation of a service provider’s funds to facilitate administration of its contract or arrangement with a plan would not in itself create a beneficial interest in those assets on behalf of the plan.
The DOL said nothing in the circumstances described about Principal’s practice would lead it to conclude amounts recorded in the bookkeeping account as representing revenue sharing payments are assets of a client plan before the plan actually receives them. However, the client plan’s contractual right to receive the amounts agreed to with Principal, or to have them applied to plan expenses, would be an asset of the plan. Similarly, if Principal should fail to pay amounts as required by the contract or arrangement with the plan, the plan would have a claim against Principal for the amount owed and the claim would be an asset of the plan.
Like many other providers Principal makes available to retirement plans a variety of investment options and receives revenue sharing payments from these investments in the form of Securities and Exchange Commission Rule 12b-1 fees, shareholder and administrative services fees or similar payments. Although Principal retains all of the payments, it may agree with a client to maintain a bookkeeping record of revenue sharing received in connection with the plan's investments. The bookkeeping account (also called "ERISA account" or "ERISA budget") reflects credits to the plan calculated by reference to the estimated revenue sharing payments. In accordance with terms in the agreement or directions from a plan fiduciary, Principal will apply the credits to pay certain plan expenses, such as for the services of accountants, consultants, actuaries or attorneys to the plan. Alternatively, Principal may agree to deposit an amount equal to the credits directly into a plan account, periodically or on specified dates.
Principal deposits the revenue sharing payments into its general asset accounts and does not establish a special bank or custodial account to hold the revenue sharing payments. None of its agreements with the client plans call for Principal to segregate any portion of the revenue sharing payments for the benefit of any plan, and Principal makes no representations to the plan fiduciaries or to any plan participants or beneficiaries that revenue sharing amounts it receives will be set aside for the benefit of the plan or represent a separate fund for payment of benefits or expenses under the plan.
For plan sponsors, the Groom Law Group memo noted the DOL also pointed out that ERISA's general prudence requirements apply to revenue sharing agreements with recordkeepers, so plan sponsors must continue to act prudently and in the best interest of participants in the negotiation of these types of agreements with service providers. The DOL specified "[p]rudence requires that a plan fiduciary, prior to entering into such arrangement, under the formula, methodology and assumptions used" by the service provider in crediting the plan with revenue sharing payments. In addition, plan sponsors should periodically monitor ERISA accounts, the amounts credited and the amounts applied to payment of plan expenses.
Advisory Opinion 2013-03A is here.
Groom's memo can be downloaded from here.