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News from, November 9, 2011
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Interesting Issues Presented Under 408(b)(2)

By Fred Reish, Partner/Chair, Fiduciary Services ERISA Team at Drinker Biddle & Reath LLP

This article is one in a series of articles on interesting issues presented under the 408(b)(2) regulation and its disclosure requirements.

It has become fairly common for plans to have expense recapture accounts (which are also known as ERISA budget accounts, PERAs-plan expense recapture or reimbursement accounts, and by a variety of other names). Typically, those accounts are established within a plan when a service provider (most often the recordkeeper) receives compensation through revenue sharing in excess of its reasonable charges. For example, if a reasonable charge for the recordkeeping/TPA services was $50,000 and the recordkeeper received $60,000 in revenue sharing, the excess amount would be deposited into the expense recapture account-thereby avoiding the prohibited transaction issue of excess compensation.

However, sometimes the record keeper/TPA places the money in its corporate account and tells the plan sponsor that the money can be spent for the benefit of the plan, at the direction of the plan sponsor. While that presents a number of fiduciary and prohibited transaction issues, it also presents an interesting, and problematic, 408(b)(2) compliance issue for service providers.

For example, when an accounting firm audits a 401(k) plan, it is usually compensated by the plan or the plan sponsor . . . and in that context, the accounting firm is not a "covered” service provider for 408(b)(2) purposes. Since the accounting firm is not covered by the 408(b)(2) regulation, it is not required to make the disclosures under the regulation. However, when an accountant receives "indirect compensation” (which, generally stated, is a payment from anyone other than the plan or plan sponsor), the accounting firm becomes a "covered” service provider and thus must make the required disclosures. Since a payment from a record keeper/TPA is not from the plan or the plan sponsor, it is "indirect compensation,” and as a result the accounting firm has become a covered service provider and must make the 408(b)(2) disclosures. But, what happens if the accounting firm hasn’t made those disclosures? The answer is simple . . . the arrangement is a prohibited transaction and the compensation belongs to the plan and not to the accounting firm. But, what if the accounting firm didn’t realize that it was being paid from an account of the recordkeeper/TPA? Unfortunately, there doesn’t seem to be any relief from the prohibited transaction consequences.

Similar issues exist for attorneys, actuaries, consultants and others who receive indirect payments.

Article provided by Fred Reish. Reish is a partner Drinker Biddle in Los Angeles. He works in the firm's Employee Benefits & Executive Compensation Practice Group and is chair of the Financial Services ERISA Team. He has specialized in employee benefits law since 1973 and works with both private and public sector entities and their plans and fiduciaries; representation of plans, employers and fiduciaries before the governing agencies (e.g., the IRS and the DOL); consulting with banks, trust companies, insurance companies and mutual fund management companies on 401(k) investment products and issues related to plan investments; and representation of broker-dealers and registered investment advisers on issues related to fiduciary status and compliance, prohibited transactions and internal procedures.

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