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The Role of an ERISA Expense Account in Paying Plan Expenses

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Stephen I. Jurmu
Foster Swift Employment, Labor & Benefits Quarterly
Fall 2010

A.   BACKGROUND

Each participant in a retirement plan is often given the opportunity to invest his or her plan account balance in various investment vehicles. Each investment vehicle is managed by a "Fund Manager" who is paid a management fee (the "Fee"). That Fee is typically computed as a percentage (for example, 80 basis points) of the assets under management. This Fee will typically be taken from the investment return that would otherwise have been credited to each participant’s plan account (for example, the investment return that is credited when using an 80 basis point Fee will be 7.2% rather than the actual 8.0% rate of return). Sometimes the Fee is deducted directly from the participant’s account. As the market value of plan assets grows, its fiduciaries may conclude that the sheer size of its assets under management will produce a Fee that exceeds any reasonable amount of Fund Manager compensation. In that circumstance, the plan fiduciaries sometimes conclude that they have a duty to negotiate a lower Fee. Any Fee savings that the fiduciary negotiates is typically applied in one of the ways that is discussed in subparagraphs 1. and 2. below.

  1. IMPROVING THE RATE OF RETURN. The fiduciary may negotiate a Fee reduction that improves the rate of return on the investment. For example, an 80 basis point Fee could be reduced to 60 basis points. In that case, an 8.0% return on assets would result in a 7.4% return to the participant’s account. 60 basis points would be paid to the Fund Manager as its Fee.
  2. FUNDING THE ERISA EXPENSE ACCOUNT. The fiduciary may negotiate a Fee reduction that creates revenue for use in an ERISA Expense Account. For example, an 80 basis point Fee could be reduced to 60 basis points. In that case, an 8.0% return on assets would result in a 7.2% return to the participant’s account. 60 basis points would be paid to the Fund Manager as its Fee, and 20 basis points would be credited to the ERISA Expense Account.

B.   PURPOSE OF ERISA EXPENSE ACCOUNT.

The purpose of an ERISA Expense Account is to use its assets to pay plan-related expenses that can properly be paid from plan assets (for example, certain legal, accounting, and record keeping fees). ERISA Expense Account assets are, in the case of a plan that is subject to ERISA, treated as plan assets and are subject to ERISA’s fiduciary standards.

C.   MAINTAINING THE ACCOUNT.

The ERISA Expense Account can be maintained in either of the two ways that are described below.

  1. INSIDE THE PLAN. When the ERISA Expense Account is held inside the plan, the excess revenues are placed in an allocated account within the Plan. The funds held in the allocated account may be used to pay plan expenses during the plan year. However, any funds remaining in the allocated account at the end of the plan year must be allocated to the plan accounts of plan participants. The method of allocating excess revenue among plan participants’ plan accounts can be either pro rata based on the size of the participants’ respective account balances, or per capita in identical amounts.
  2. BY THE RECORD KEEPER. The record keeper may retain the excess revenues as a credit that the plan may utilize to pay plan expenses at any time. The money is not deposited into a plan account since it is retained by the record keeper for the benefit of plan participants. As a result, the credit may be carried forward from year to year without any requirement that the excess be allocated to participants’ plan accounts.

Please let us know if you would like to discuss the use of an ERISA Expense Account.