When discussing indirect compensation in relation to defined contribution plans, float income typically receives minimal coverage. However, litigation risk persists in a post-408(b)(2) world with regards to float. Diligent plan fiduciaries should be aware of this trickle of income and its implications.

Float or Float income represents interest that may be earned on cash held for investment or distribution. For most institutional trustees, the omnibus nature of these cash accounts makes it difficult to track and allocate the appropriate amounts at the participant level; thus the float is typically absorbed by the trustee or custodial firm.

While these earnings constitute eligible indirect compensation for Schedule C purposes, they could potentially be considered a prohibited transaction under ERISA if not properly disclosed. For that reason plan fiduciaries should make sure that float income is addressed within the service agreement between the plan and the applicable service provider and that it is properly disclosed on the form 5500 Schedule C. In order to avoid a prohibited transaction of fiduciary self-dealing, the service agreement must clearly state that the trustee may retain float income as additional compensation and provide a formula to estimate the dollar amount of compensation. Float income must be included in a discussion of the reasonableness of the service provider's fees. It would be wise of plan fiduciaries to review the possibility of float income with their service providers, make sure it is reasonable, and, if possible, request certain fee offsets if the accumulation of float is significant enough.

With interest rates currently low, it would seem reasonable that most service providers are not earning a significant amount of float income; however, as interest rates increase, this could become a large source of income for a service provider. Plan fiduciaries may be able to manage float by:

• Having clear policies in place for timing of contributions being invested (i.e., a limit of how many days after funding until contributions are invested)


• Reviewing outstanding checks that have not been cashed in a timely fashion and the procedures in place to locate and have participants cash stale-dated checks.

When a plan fiduciary does their annual plan checkup normally around 5500 time it would be a good time to discuss float with the service provider and make sure all the necessary disclosures are being done, including Schedule C of the 5500 and service agreements.