Tackling Revenue Sharing

Increased fee disclosure regulations and improved plan provider technology are adding to the popularity of a plan administration feature called the ERISA account, said Quana Jew, Partner at the law firm Arent Fox LLP. An ERISA account is an accounting device that can be used to capture any excess vendor revenue generated by plan investments (see “A New Way To Pay,” PLANADVISER, May-June 2008).

Tony Ciocca, Managing Director, Institutional Investment Consulting, an NRP member firm, said ERISA accounts allow plan sponsors to step back and determine what it actually costs to have a plan and determine, especially at large plans, where the gap between costs and revenues generated can be larger. “[It] allows for above-board fee disclosure,” he added.

Jew noted that ERISA accounts may be used to pay plan administrative expenses, be allocated to participants, or both. However, she warned that “settlor functions,” such as plan terminations, cannot be paid by ERISA accounts and noted that more guidance on settlor fees versus the expenses that can be paid from plan assets can be found on the Department of Labor’s Web site. Jew noted that the money from the ERISA accounts must be used by the end of the year and the plan sponsor should get a detailed record of how the money in the account is distributed. If plan costs will not exhaust the entire ERISA budget, sponsors must decide how the excess will be allocated to participants. Advisers also should ask the plan’s recordkeeper about reporting capabilities for ERISA accounts.

When working with recordkeepers, Jew said advisers should check the plan document for restrictions on how fees are paid and cautioned that the plan must allow expenses to be paid with plan assets. Ciocca added that it is a good idea to get clients’ attorneys included in discussions. If the plan document does not provide for the use of plan assets to pay expenses, it can be amended.

Peter M. Coleman, Managing Partner, The Benefits Practice, said ERISA accounts are beneficial for plans with more than $5 million in assets. “It is a new asset that doesn’t cost a thing, plus it pays fees.” He warned, however, that expenses to be paid from the account should be approved by the plan sponsor because it is a distribution of plan assets.

According to Barbara Delaney, Principal at StoneStreet Equity, Inc., some vendors will not offer ERISA budgets in their systems, but may offer service credits back to mutual funds. Jew noted that whether or not a vendor will participate may be based on how the service contract with that vendor is set up.

Coleman suggested that, if a vendor will not allow for an ERISA budget for excess fees, advisers should make sure the plan is in the cheapest share class and has the lowest fees possible to guard against paying excessive fees.