Marshall Cobb, CRSP, AIF®
Senior Vice President | CAPTRUSTFinancial Advisor
It was once commonplace for recordkeepers to offer mostly proprietary investment options within a defined contribution plan menu. Through soft-dollar income, that investment menu generated the revenue needed to provide recordkeeping services as well as profits for the recordkeeper.
More recently, the broader marketplace began forcing recordkeepers to offer access to non-proprietary investments. These funds enter agreements with recordkeepers to share revenue in the form of sub-transfer agent (Sub-TA) fees, and as part of that process, recordkeepers began agreeing to cap their annual fee on plans at a certain level. As revenue was received, either all, or a portion of the amount in excess of the cap was in turn set aside in what many call an “ERISA Budget Account.” However, this name is somewhat ironic, as these accounts do not appear within the regulations known as ERISA. It is also interesting to note that the sums placed in these accounts, which are considered to be “direct compensation” for the end recipient, were previously the often undisclosed profits of the recordkeeper (and what the Department of Labor now clearly labels "indirect compensation").
As many aspects of this practice continue to evolve, including disclosure, we set out to query several of the largest recordkeepers regarding how they handle and account for “ERISA Budget Accounts.” A summary of our findings is below.
We found that the recordkeepers who responded largely agreed on the following fronts:
• ERISA budget dollars are a plan asset (although one responding recordkeeper did not treat these dollars as a plan asset prior to 2012)
• Funds are set aside in an actual account located within the plan (one recordkeeper previously utilized a hypothetical account which expired each year)
• Payments from the account are considered direct compensation for the recipient
• Unused balances from prior years are never forfeited (exception noted above)
• ERISA Budget Account dollars cannot be used to offset employer contributions
We found that the recordkeepers who responded had varying opinions on the following fronts:
• The specific location of these accounts and related activity on Form 5500
• Guidelines for determining whether or not particular expenses are eligible for payment from the account (though most ultimately leave this to the Plan Sponsor’s discretion)
• Timing surrounding when eligible expenses for a given plan year must be paid from the account
• Where the final destination of dollars remaining after expenses are directed (some recordkeepers will force issue on reallocation to participants)
• The name used in reference to these accounts (ERISA Budget vs. Plan Expense Account, etc.)
• Processing — this can be as simple as an email from the Plan Sponsor directing payment, or as complicated as a lengthy set of required forms and approvals
While the respondents to our query represent only a portion of the recordkeeping industry, the diversity of their responses clearly implies that Plan Sponsors should be fully versed in the unique treatment of ERISA budget dollars within their plan. After all, in the Department of Labor’s view, it is the Plan Sponsor, not the recordkeeper, who is responsible for understanding, reporting and managing the fees paid by their plan assets. In coordination with external legal counsel, we strive to ensure that CAPTRUST Clients fully understand all aspects of “ERISA Budget Accounts.” Please let us know if we can help.