Surprisingly, in the settlement with ING announced in your Feb. 4 article, “ING pays $5.7 million in settlement over trading policy disclosure,” by Hazel Bradford, the Department of Labor regarded profits from 401(k) service provider processing errors as additional compensation which ING had a duty to disclose, thus permitting ING and other service providers to keep such profits as long as they treat these profits as compensation and disclose their practice to the plan.
The issue is similar to the disposition of float income, which was the subject of the recent ABB Ltd. decision last March in which the court found that float income was a plan asset which should have been credited back to the plan rather than applied to the costs of the third-party administrator in the absence of disclosure and agreement to treat float income as additional compensation. However, there is one difference.
In the case of float income, one is certain that income will arise while cash is held in an interest-bearing account pending disposition. When delaying the processing of a transaction that can give rise to a profit or a loss, one does not know in advance which will occur, the profit or the loss. A cynic would therefore argue that, by permitting service providers to retain profits from processing errors as long as they are disclosed as additional compensation, the Labor Department is encouraging service providers to gamble on the timing of “processing errors.” Of course, an error prone service provider runs a risk of reputational damage and loss of business but ERISA is supposed to protect plans from abuse and the payment of compensation beyond what is reasonable. It is hard to see how this settlement furthers those interests.
In fact, the argument could be made that the profits from processing errors are plan assets and that a service provider cannot keep the fruits of its errors, requiring the profits be restored to the plan, irrespective of what the contract says. What was the Labor Department thinking?
Roger L. Levy
CEO, Cambridge Fiduciary