Float earned on disbursement accounts

[Guest ircreader]

Our 401k administrator sends distributions to a bank account where it waits for presentation of the check by the participant. The bank earns interest on this money. It gives the plan "earnings credits" that are used to offset the bank fees. When the rates are high, the earnings credits exceed the bank fees (not the situation now). Our company would like to use the excess earnings credits to offset its bank fees. We have advised that the earnings credits can only be used by the plan or its participants under the exclusive benefit rules; to use it for the company would be a violation of ERISA sec. 406(b)(1) as explained by the DOL in Advisory Opinion 93-24A.

They say that under the bank regulations, the bank cannot pay the trust interest so they will be forced to let the earnings credits inure to the benefit of the bank. Field Assistance Bulletin 2002-3 states that as fiduciaries we should monitor to be sure the plan is paying reasonable bank fees. In essence, the bank's compensation is increased by realizing the excess earnings credits (interest earned by the bank in excess of the bank fees). Doesn't this put us in a Catch 22 position (we cannot use the excess earnings credits but if the bank can't offset its fees, they in essence earn more compensation)?

Does anyone else have this problem? Is there a solution? (We have advised that if the $ did not sit in the disbursement account as long, there would be less in earnings credits/interest for the bank.)

[four01kman]

Don't know if you can do this, but I've heard some plans use demand deposits. As I understand it, no money is transferred to the "checking" acount until a check is presented, then the money is transferred from the "fund". If the fund maintains a cash account at the bank that is handling the distributions, it sounds like a simple matter. If not, then the disbursing bank has to be able to draw or request funds from the fund.

[Guest ircreader]

Thank you. We have considered setting up a general account at the bank with a controlled disbursement account. For some reason, our company officers are saying the banking reg's would keep the bank from paying the interest earned on the general account to the plan.