Float, generally short-term interest that results from a temporary investment of funds pending final direction/resolution by the plan or its beneficiaries, should be regarded by plan fiduciaries and service providers as part of the service provider’s compensation for services to the plan, according to the DOL’s Pension and Welfare Benefits Administration. As such, the PWBA notes that the plan sponsor must understand how the service provider will earn float, and how it contributes to the service provider’s compensation. Additionally, service providers must disclose information sufficient to allow the plan fiduciary to make an informed evaluation.
The PWBA notes that its field offices have found a variety of methods by which plan fiduciaries are informed of, and or approve, the practice of plan service providers retaining float as part of their overall compensation – typically a notation in a fee schedule or service agreement that such compensation may result. However, PWBA investigators said there little or no disclosure of specific information regarding compensation earned in the form of float, and requested further guidance regarding the obligations of providers and fiduciaries regarding these float arrangements.
As a result, the PWBA issued Field Assistance Bulletin 2002-3 , which outlines what a fiduciary should consider in evaluating the reasonableness of an agreement under which a service provider, notably banks and trust companies, retain “float” interest charge charges on funds related to cash transactions related to retirement plans.
In Advisory Opinion 93-24A, the PWBA said that a trustee’s exercise of discretion to earn income for its own account from the float attributable to outstanding benefit checks constitutes prohibited fiduciary self-dealing under section 406(b)(1) of ERISA. However, the PWBA notes that that opinion dealt with a situation where there was no disclosure of the float to employee benefit plan customers. In a subsequent information letter to the American Bankers Association dated August 11, 1994, the Department said that ” . . . if a bank fiduciary has openly negotiated with an independent plan fiduciary to retain float attributable to outstanding benefit checks as part of its overall compensation, then the bank’s use of the float would not be self-dealing because the bank would not be exercising its fiduciary authority or control for its own benefit. Therefore, to avoid problems, banks should, as part of their fee negotiations, provide full and fair disclosure regarding the use of float on outstanding benefit checks.”
In the new bulletin, the PWBA reiterated its support for the open negotiation and full and fair disclosure of provider compensation, and said its earlier communications were intended to ensure that service providers provide sufficient information concerning such arrangements so that plan fiduciaries can make informed assessments concerning the prudence of the arrangements.
Additionally, the PWBA said it intended that the amount of the service provider’s compensation is determined and approved by a fiduciary independent of the service provider so that prohibited self-dealing is avoided.
In its new bulletin, the PWBA said the plan sponsor’s selection and monitoring process should include:
- a review of comparable providers and service arrangements (e.g., quality and costs) to determine whether such providers may credit float to the provider’s own account, rather than the plan.
- a review of the circumstances under which float may be earned by the service provider.
- a review of sufficient information to enable the plan fiduciary to evaluate the float as part of the total compensation to be paid for the services to be rendered under the agreement, notably the rates the provider generally expects to earn.
- periodic monitoring of compliance by the service provider with the terms of the agreement and the reasonableness of compensation under the agreement.
Regular “Check” Ups
The PWBA cautioned fiduciaries to be aware that delays on the part of the plan in providing investment instruction or delays in implementing investment direction by the service provider could result in increased compensation in the form of float. Additionally, since issued checks are generally funded by the plan to the disbursement account on check date, fiduciaries should be aware that float is generally earned those funds from the date of the check until presented for payment by the payee. Consequently, the PWBA cautioned that fiduciaries should review periodic statements or reports of checks outstanding for “unusually long” periods of time (such as 90 or more days).
The bulletin also noted that, in the case of float on funds awaiting disbursement, fiduciaries should ensure that their service agreements specify the time at which assets are transferred from the plan to the general account (e.g., the date the check is requested, the date the check is written, or the date the check is mailed). Additionally, since the timing of a check distribution could affect the amount of float, service agreements should provide, if relevant, an indication as to when checks are mailed following a direction to distribute funds.
The PWBA noted that the primary issue for service providers with float arrangements is whether the provider has disclosed to its employee benefit plan customers sufficient information concerning the administration of its accounts holding float so that the customer can reasonably approve the arrangement based on an understanding of the service provider’s compensation. However, providers were cautioned that such arrangements must not permit the provider to affect the amount of its compensation in violation of section 406(b)(1), for example by giving itself broad discretion over the duration of the float.
The service bulletin further outlined the following steps that can help service providers avoid self-dealing issues, including:
- disclose the specific circumstances under which float will be earned and retained.
- establish, disclose and adhere to specific time frames within which cash pending investment direction will be invested following direction from the plan fiduciary, as well as any exceptions that might apply.
- disclose when the float period commences (e.g., the date check is requested, the date the check is written, the date the check is mailed) and ends (the date on which the check is presented for payment).
- disclose, and adhere to, time frames for mailing and any other administrative practices that might affect the duration of the float period.
- disclose the rate of the float or the specific manner in which such rate will be determined. For example, earnings on cash pending investment and earnings on uncashed checks are generally at a money market interest rate.
Questions concerning the bulletin may be directed to Louis Campagna or Fred Wong, Division of Fiduciary Interpretations at 202.693.8510.