PD08. Understanding an ERISA Account

Plan sponsors and advisers know them by many names - ranging from "ERISA budgets" to "fee-capture accounts" - but many do not understand the restrictions that surround the use of these accounts or the many benefits they can provide a plan.

Jason Bortz, Partner at Davis & Harman LLP, divided ERISA accounts into two groups in remarks to a discussion group at PLANSPONSOR ‘s recent Plan Designs Conference.

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Within the first category of ERISA accounts, fiduciaries might give investment advice that favors them directly or through various affiliates, allowing them to receive additional compensation. The other type involves the investment adviser being paid on a fixed-fee basis by the plan sponsor, he said.

The second type focuses on recapturing excess revenue and returning it to the plan sponsor and participants if they are paying too much.

While there are other options that can similarly benefit plan sponsors and participants, ERISA accounts can provide a new and relatively easy solution for those who are willing to take the time to study the details of their regulations and operation mechanisms, discussion panel members said.

Rather than just accounts that are subject to ERISA, Peter Swisher, VP and Senior Institutional Consultant for Unified Trust Company, offered this explanation:

"These are ways of handling revenue shares. … You have a plan, the plan has investments, the investments charge a percentage of assets, and that percentage is large enough that the mutual fund family or money manager is willing to refund some of it; they're willing to cut their price in the form of a rebate. … Any form of payment … back to the plan - not to the sponsor, to the plan - is money that has to be handled properly, so the mechanism for handling those monies is an account that you set up to hold them, track them, and properly apply them. So that's what an ERISA account is."

These accounts can be used to pay for various fees within a plan.

Barbara Delaney, Principal for Stone Street Equity, Inc., said that while there are strict restrictions concerning which expenses can be covered, some legal and auditing fees are allowed. However, there are allowances and whatever is not used during a year can be added back as a plan asset.

She admitted the process can be difficult to explain to participants and the process of setting one up is complicated, but to have one fully functioning in a plan can be profitable.

However, plan sponsors must first determine how they will transfer that money back into the plan, as the mechanisms can vary between plans and companies. Swisher complained that having an obligation to give the money back to the plan can be a burden to sponsors when consistently underpaid by different companies.

If they want to help their participants, the plan sponsors will have to track down and pursue the fees they are owed, while navigating the complex procedures for handling ERISA accounts. Delaney suggested tracking payments on a quarterly basis as a potential solution to help reduce the extent of the challenges facing sponsors.

-Sara Kelly