Can Record-keeping Fees Be Paid by the Plan?
Plan Sponsors sometimes ask whether and to what extent fees for the ongoing operation of a workplace retirement plan can be paid by plan participants. Vestwell is not a law firm, and we cannot and do not provide legal advice, but this summary provides a guide that sponsors can use for discussion with their own legal advisor. The Department of Labor (“DOL”) closely examines plan-related expenses to distinguish between expenses that may be viewed as only benefitting the plan sponsor and those that assist the plan and its participants. Costs for services and activities that solely benefit the plan sponsor are referred to as “settlor” expenses and generally can only be paid by the plan sponsor’s corporate assets.
Which fees can be paid by the plan?
The DOL has published guidance as to what expenses can and cannot be paid by the plan, which includes:
- Activities that take place in advance of or in preparation for a plan change will almost always constitute a “settlor” expense. This would include benefit studies or similar advice regarding starting a workplace retirement plan.
- The plan can pay expenses incurred to implement many “settlor” decisions as long as they are reasonable and not prohibited by the plan documents. For example, the cost of performing annual compliance testing, amending the plan to maintain tax-qualified status, and communicating with participants about the plan are generally considered plan expenses.
- Administrative functions like calculating benefits to which a participant is entitled can be paid by the plan. The DOL noted that a plan could pay both the start-up fees and the ongoing administrative fees charged by a third-party service provider for services necessary to administer the plan. However, there is a risk that the DOL may find that the costs to start a plan primarily benefit the sponsor over the participants and therefore must be paid by the sponsor.
- Fees associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. Participants usually pay for these in the form of an indirect charge against their account because they are deducted directly from their investment returns.
- Plan amendments present some complexities. A plan may not pay for drafting an amendment that permits the plan to pay plan expenses where the employer was previously required to pay those expenses. A plan can pay for the cost of drafting an amendment even if the employer had discretion in choosing among several options for amending, so long as some amendment was “legally required.”
- In certain circumstances, insurance costs for the plan fiduciaries or for the plan to cover liability for a fiduciary’s actions may be paid by the plan if the plan is the named insured party.
The decision about whether to pay an expense from the plan sponsor’s corporate assets or the plan or to later shift those expenses is a fiduciary decision solely for the sponsor. Vestwell does not have any involvement in that decision. We suggest that the sponsor evaluate the reasonableness of those expenses and confirm with its legal or tax advisor that any payment responsibility does not jeopardize the tax-qualified status of the plan. If your plan maintains a forfeiture account, certain plan expenses may be paid from it, depending on the language in the plan document.
Allocating plan expenses among participants
For costs that the sponsor determines should be paid by the plan, ERISA gives sponsors flexibility as to how plan expenses can be allocated among participants and beneficiaries. For example, the DOL has permitted plans to charge participants a reasonable cost to provide paper copies of plan documents by regular mail in certain circumstances. An individual participant can also be charged a reasonable fee for taking a loan, withdrawal, or hardship distribution.
Other plan expenses can be allocated across all participants following the method set forth in the plan document or, if the document is silent or ambiguous, the plan fiduciary has considerable discretion in allocating expenses even if the allocation method ultimately favors a class of participants as long as there is a rational basis for the selected method. The fiduciary should weigh the competing interests of various classes of the plan's participants and the effects of various allocation methods on those interests. If the individual making the decision is also a plan participant, they must be careful in making sure that the allocation method does not raise what the DOL calls a “prohibited transaction” when the decision-maker is protecting their own interest at the expense of other participants. Plans must include in the Summary Plan Description (“SPD”) a summary of any fees payable by a participant or beneficiary or any circumstances that may result in the offset or reduction of any benefits that a participant or beneficiary might otherwise reasonably expect the plan to provide.
Expenses for separated vested participants
Some sponsors ask whether plans can charge fees for terminated participants who have a balance in the plan. The DOL allows plans to charge an administrative expense for the account's share of reasonable plan expenses on a pro-rata or per capita basis, even if the accounts of active participants are not charged such expenses.