Once the province of only large plans, ERISA Accounts have found their way into the small plan market. And if you’re an advisor working in that market, it can be an important tool for you to add value to plan sponsors.
It can be called many things:
- ERISA Account
- ERISA Budget Account
- ERISA Expense Account
- Expense Recapture Account
- Revenue Sharing Account
Regardless of what it’s called, it can be part of sound fiduciary governance to let the sunshine in to the cost of operating a 401(k) plan.
Once the province of only large plans, ERISA Accounts have found their way into the small plan market. And if you’re an advisor working in that market, it can be an important tool for you to add value to plan sponsors.
What’s an ERISA Account? Simply stated, it’s a 401(k) plan level account that captures excess income collected by the recordkeeper. For today, we’ll skip how and where this excess income is generated, and focus on how it can be used.
How An ERISA Account Can Be Used
Excess income can be used to 1) pay eligible plan expenses; 2) or allocated to participants.
Pay Plan Expenses
It’s part of basic ERISA that a fiduciary must “act for the exclusive purpose of providing benefits to plan participants and defraying reasonable expenses of administering the plan.”
The Department of Labor (DOL) says that reasonable administrative expenses could include:
Plan amendments required by change in law
- Plan amendments necessary to maintain tax qualified status
- Nondiscrimination testing
- Recordkeeping
- Plan accounting
- Preparation of Form 5500
Plan assets, however, cannot be used for “Settlor Functions,” i.e., those expenses that are for the benefit of the employer.Settlor Expense could include:
Studies of options for amending plan to maintain tax qualified status or for meeting new legal requirements
- Terminating plan
- Testing to explore plan design
- FASB statements
- Union negotiations about plan provisions
The Labor Department also permits participants to be charged for the reasonable cost of transactions attributable to individual participants, e.g., loans, QDROs, hardship withdrawals, calculations to determine benefits under various distribution alternatives, and benefit distributions.
(Note that I’m not addressing what’s “reasonable” which is a key component of fee disclosure under the DOL’s 408(b)(2) fee disclosure regulation. I’ll get back to you later on how advisors can help employers determine and document the reasonableness of the fees disclosed by plan service providers).
Reallocate To Participants
In addition to paying for reasonable plan expenses, funds in an ERISA Account may be reallocated to participant accounts pro-rata based on their account balances at the end of the year, or on a per capita basis. Most attorneys would advise that the funds must be used by the end of the plan year. They cannot be rolled over to another plan year, or returned to the employer.
Best Practices
As with all things ERISA, there has to be proper documentation. Best practices would be to specifically state in the plan document that the plan may pay reasonable operating expenses, reflect that in the Summary Plan Description or Material Modification thereof, and have a written Expense Policy.
Conclusion
Not all 401(k) plans will see excess income that can be used in an ERISA Account. However, as we move in the “Age of Transparency”, expect to see ERISA Accounts become more prevalent with both 401(k) platform and open architecture providers in the small plan market.
It can be an important and distinguishing way for you to add value.
Jerry Kalish is President of National Benefit Services, Inc., a Chicago- based Third Party Administrator. He can be reached at
