TPA revenue sharing

[Santo Gold]

We receive revenue sharing from mutual fund company that we use to offset against our TPA fees to the plan sponsor. We have not yet been in a position where our fees are less than our revenue sharing for the year, but that will likely change for a few clients soon. Is it acceptable for us as the TPA to take whatever excess in revenue sharing exists at year end and write a check back to the plan sponsor? We prefer not to simply keep a "credit" on our books for any excess. Are there any other acceptable ways to handle this?

[My 2 cents]

Please tell me that you, as TPA, do not participate in the selection of the mutual fund company in which the plan assets are invested, especially if there is an arrangement for the mutual fund company to pay you revenue sharing. That would appear to represent a conflict of interest, wouldn't it, possibly a fiduciary violation? Or do I just not understand the situation you described?

[Lou S.]

I think what you are describing would be a prohibited transaction.

I believe you can credit it back to plan participants as additional gains but I don't believe you can't take revenue sharing above your fees and rebate it back to the Plan Sponsor.

[ESOP Guy]

Increase your fees!!!!!

[Peter Gulia]

Or invite the plan fiduciaries to evaluate some investment alternatives that pay a little less indirect compensation.

[Santo Gold]

no, we have no voice (and do not want one) in the selection of mutual funds.

But why would it be a PT to kick the extra money back to the plan sponsor? Once the money is out of the plan and is "legitimately" paid to the TPA, we can do whatever we want with it, right? And if we agree to pay it back to the plan sponsor.....why is that a PT?

[MoJo]

Some would say it's a "plan asset" and therefore a reversion would be prohibited. Regardless, it's income generated through the use of plan assets and therefore would be a PT if paid to a party in interest ("use of plan assets for personal gain") - unless an exception exists (and there is one to allow for the payment of "reasonable fees" incurred in the operation of the plan - which is how you get paid...).

[david rigby]

Would it help if (all of the) fees went directly to the plan, and then you invoice the plan (or plan sponsor)?

[KJohnson]

http://www.dol.gov/ebsa/regs/AOs/ao2013-03a.html

[Kevin C]

Even ignoring that the excess amounts might be plan assets, I think you would have a problem since you would be receiving more than reasonable compensation, which violates one of the requirements for the PT exemption that lets service providers be paid by the plan. If it is more than your fee, how can the amount received be reasonable? What services is the plan sponsor providing to the plan to justify the indirect compensation you are asking if they can be paid? In my opinion, the best course of action is to have the extra amounts deposited in the plan. You should consult an ERISA attorney with PT experience before proceeding.

From the link above:

Regardless of whether the revenue sharing payments are plan assets, the arrangement between Principal and its client plans would be subject to certain provisions of ERISA. As a provider of services to a plan, Principal would be a party in interest with respect to the plan pursuant to section 3(14)(B) of ERISA. The furnishing of goods, services or facilities between a plan and a party in interest is generally prohibited under section 406(a)(1)© of ERISA. However, section 408(b)(2) of ERISA exempts certain arrangements between plans and service providers that otherwise would be prohibited transactions under section 406(a)(1)© of ERISA. Specifically, section 408(b)(2) provides relief from ERISA's prohibited transaction rules for service contracts or arrangements between a plan and a party in interest if the contract or arrangement is reasonable, the services are necessary for the establishment and operation of the plan, and no more than reasonable compensation is paid for the services. Regulations issued by the Department clarify each of these conditions to the exemption.⁽⁵⁾