In November 2002, the Department of Labor (“DOL”) issued Field Assistance Bulletin 2002–3 (“FAB 2002–3”) to fill a perceived gap in guidance on float, hoping that plan fiduciaries will review their plans for compliance and take steps to protect themselves from overcompensating their service providers. FAB 2002–3 provides guidance to financial service providers and plan fiduciaries on meeting the responsibilities that accompany float.
“Float” refers to earnings retained by a service provider (usually a bank or brokerage company) that result from short-term investments in highly liquid accounts used to facilitate cash transactions. Funds held in these accounts may include funds to cover checks issued for benefit payments by employee benefit plans that are not yet presented for payment by the recipient, or uninvested funds awaiting investment instructions from a plan fiduciary, among other things. According to the DOL, float constitutes compensation to the service provider from plan assets; it must, therefore, be taken into account in reviewing the reasonableness of the provider’s total compensation, and, if necessary, used to offset the provider’s regular fees when negotiating or renegotiating the provider’s agreement to provide services. This ongoing assessment should be considered part of a plan fiduciary’s normal responsibilities in prudently administering its plan.
However, projecting the amount of compensation that will arise from float can prove difficult because of the unpredictability of short term interest rates, and the timing and amount of cash flows in and out of the plan. Although these variables are not completely quantifiable beforehand, there are steps that can and should be taken to predict and account for float. It is important to realize that float is an issue for any plan or trust dealing with transactions through a financial service provider.
Requirements for Service Providers
The DOL has long held that any service provider who retains float unbeknownst to the plan does so in violation of ERISA. In order to prevent this self-dealing, steps must be taken to adequately inform the plan fiduciary of float and its attendant factors. FAB 2002–3 spells out certain disclosure and practice steps that service providers must take to meet their responsibilities. First, service providers must inform a plan fiduciary of the circumstances under which float will be earned and retained. Second, in cases involving funds held pending investment direction, disclosure must be made of specific time frames established for investing such funds once direction is received. Third, for float on pending distribution checks, determination and disclosure must be made of when float begins (such as date of issue, date of mailing, etc.) and ends, and the time frame for mailing checks, as well as other administrative practices that may affect the duration of float. Finally, service providers must either disclose the applicable interest rate of float, or the specific manner for determination of that rate, if the rate will vary.
Requirements for Plan Fiduciaries
Under Section 408(b)(2) of ERISA, a contract providing services necessary to the operation or administration of the plan is allowable so long as the expenses associated with the contract are reasonable. In order for fees for services to be considered reasonable, a fiduciary must make an objective comparison of the services offered, qualifications and fees of potential service providers. In selecting and monitoring a service provider where float is involved, a fiduciary must review certain things. First, comparable providers’ practices should be reviewed to determine whether the practices of the provider at issue are reasonable and consistent with industry practice. Second, circumstances under which float is earned by the service provider should be reviewed. This includes looking into how quickly investment instructions are implemented and the rules governing such practice, as well as information concerning float on funds awaiting distribution. In addition, service contracts should provide specific details indicating when float begins (for example, on the date the check is requested, the date it is actually issued, or the date it is mailed). A fiduciary must keep in mind that float will be earned until the payee actually presents the check for payment. Therefore, when determining the amount of compensation actually received by the service provider, it is the responsibility of the fiduciary to be aware of certain checks that remain outstanding for longer than usual periods of time. Finally, a fiduciary must review any additional information necessary to determine the total compensation, including float, even though some of these amounts will be approximations.
In addition to the review steps listed above, it is the responsibility of the plan fiduciary to continually monitor the service provider’s compliance with the terms of the service contract and the reasonableness of the contract to ensure that the compensation earned by the service provider remains reasonable as required by ERISA.
Although there are no specific time frames set by FAB 2002–3, plan fiduciaries should take the necessary steps to quickly correct any noncompliance relating to float, both to avoid potential litigation from any number of affected parties and to avoid overcompensating their service providers. Please note that this article is not intended to be a comprehensive analysis of float issues; instead it is meant to alert plan fiduciaries to the importance of being aware of and examining issues concerning float, as well as provide an outline of how to do so. Plan fiduciaries seeking to deal with noncompliance or other issues related to float and compensation of service providers may want to obtain advice from a legal professional in order to assure complete compliance.