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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
An independent distribution consultant (IDC) appointed by the Securities and Exchange Commission (SEC) to develop and implement a plan to distribute mutual fund settlement proceeds correcting trading irregularities, but with no control over plan assets, is not a fiduciary, according to an EBSA field assistance bulletin. Moreover, proceeds from certain settlements between the SEC and various mutual fund companies would not be considered plan assets until distributed from the settlement fund and received by the appropriate plan fiduciaries.
The field assistance bulletin applies ERISA's fiduciary rules to three parties involved in the distribution and allocation of mutual fund settlement proceeds: IDCs, intermediaries allocating proceeds among omnibus account clients, and plan fiduciaries allocating proceeds among participants and beneficiaries.
IDCs are appointed pursuant to SEC Orders to create a plan to distribute the proceeds from the settlement fund to affected shareholders. Prior to implementation, distribution plans must be approved by the SEC. In this capacity, the IDC is not engaged to act on behalf of any employee benefit plans and is not an agent of the plans. The SEC has made clear that no mutual fund investor, including employee benefit plan investors, has a protected interest in the proceeds prior to distribution to affected shareholders. An IDC acting in developing and implementing a distribution plan would not exercise any authority or control in the administration or management of an employee benefit plan or its assets and, therefore, these activities would not cause an IDC to become a fiduciary under ERISA.
Unlike IDCs working under appointment of the SEC, intermediaries act on behalf of their omnibus account clients in receiving settlement fund proceeds. Therefore, settlement fund proceeds received by such intermediaries will constitute plan assets and these assets are required to be held in trust and managed in accordance with the fiduciary responsibility provisions of Part 4 of Title I of ERISA.
Intermediary exercises discretionary control. Regardless of whether an intermediary was a fiduciary with respect to an employee benefit plan prior to receiving a distribution of settlement proceeds, an intermediary assumes fiduciary responsibilities upon receipt of such proceeds for a plan as a result of having discretionary authority or control over plan assets. Such intermediary would be required to act prudently and solely on behalf of plan participants and beneficiaries. For example, the intermediary may need to invest the proceeds pending the development and/or implementation of a plan to distribute the proceeds to, or among, individual omnibus account clients.
Allocation method must be reasonable. The allocation methodology implemented by an intermediary who is acting solely in the interest of participants would not fail to meet the standard of prudence if the methodology is not an exact reflection of transactional activity of the clients, as long as it is reasonable, fair, and objective.
Intermediary may only be compensated for direct expenses. Although an intermediary may charge plans for any direct expenses incurred in the receipt, allocation and/or distribution of settlement fund proceeds, an intermediary acting as a plan fiduciary cannot compensate itself from plan assets beyond direct expenses without engaging in a prohibited transaction under ERISA §406.
In allocating settlement fund proceeds among the plan's participants and beneficiaries, a plan fiduciary must exercise prudence. For purposes of this discussion, the fiduciary may be the plan sponsor, an intermediary or other person charged with allocating the proceeds among participants and beneficiaries. An IDC may, as part of a distribution plan approved by the SEC, require that the fiduciary utilize a particular methodology for the allocation of proceeds. In the absence of such a directive, the plan fiduciary must exercise prudence in selecting an allocation method in which the proceeds of the settlement would be allocated, where possible, to the affected participants in relation to the impact the market timing and late trading activities may have had on the particular account. However, the exercise of prudence also requires a process whereby the fiduciary weighs the costs to the plan or the participant accounts and the ultimate benefit to the plan or the participants associated with achieving that goal.
Finally, the DOL opined that if the cost of distributing the proceeds exceeds the value of such proceeds to the plan's participants, it may be appropriate for a plan fiduciary not to accept the settlement distribution.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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