Case Study: Obtained Ruling Permitting Recovery of Fees for Overdrafts Extended to ERISA Plans

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Custody banks routinely fund anticipated transactions for institutional clients, including pension funds subject to ERISA, on the assumption that the necessary funds are, or will soon be in the client’s account. When an account is not funded as or when anticipated, an overdraft –a cash advance- is incurred, and the bank should be entitled to reasonable interest charges for the use of its funds. However, in 1999, the Department of Labor (DOL) took the position that overdrafts could be provided by a bank only if it did not charge interest.

Solution Provided:

Exercising industry contacts, I organized an industry coalition, developed the industry position and approached the DOL through the American Bankers Association to convince the DOL to change its position.


On February 12, 2003, the DOL issued the requested Advisory Opinion, finding that overdrafts were properly viewed as a “service” under existing statutory prohibited transaction exemptions, for which the banks were entitled to “reasonable compensation.”

Summary of minimal requirements under the DOL Advisory Opinion:

  • Plan fiduciaries must be fully informed of the terms and procedures governing overdrafts, and it must be clear that any overdraft charges are in addition to other fees.
  • Plan fiduciaries must approve overdraft charges explicitly or by implied consent.
  • Written guidelines must exist, requiring:
    • Timely notice to an appropriate plan fiduciary of overdrafts and related charges;
    • Monitoring of overdraft duration and usage; and
    • Procedures to discourage or prevent the use of overdraft protection as an effective line of credit.
Category : Case Studies