Both the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Internal Revenue Code of 1986, as amended (the “Code”), prohibit self-dealing between retirement plans (e.g., 401(k) plans, etc.) and their fiduciaries. An individual or entity can become an ERISA “fiduciary” if it exercises any discretionary authority or control over the management and/or disposition of such plan’s assets.
Third party administrators and trustees of retirement plans often hold plan assets in their own bank accounts while waiting for (1) investment directions from participants; and/or (2) distribution checks to be cashed. The short-term earnings generated in their bank accounts are generally referred to as “float.” Depending upon the terms of the underlying contractual agreements between such entities and the retirement plan sponsor, float may be retained by such entities as additional compensation.
The Department of Labor (the “DOL”) has taken the position that a service provider’s exercise of discretion to retain float is self-dealing and, as such, a prohibited transaction under ERISA. However, the DOL has historically distinguished this “exercise of discretion” situation from one in which the service provider openly retains float as part of its overall negotiated compensation arrangement.
During the past few years, the DOL has issued regulations and guidance regarding the fee disclosure rules under ERISA. See the February 3, 2012, October 25, 2010 and July 16, 2010 SGR Client Alerts. Such fee disclosure rules require third party providers, who are ERISA fiduciaries, to disclose any direct or indirect compensation that they receive from plan assets. This means that if a provider is a fiduciary of a retirement plan, it must disclose float compensation. In addition, if the provider is a non-fiduciary third party, it is now obligated to estimate how much float income it might receive.
We recommend that plan sponsors (1) review their third-party agreements to determine whether such entities are contractually entitled to retain float; (2) determine the amount of such float, if any; (3) determine whether the float being retained is reasonable compensation (based on the provider’s overall compensation package); (4) continue to monitor the amount of float for reasonableness; and (5) assess (and continue to assess) whether comparable providers retain float.