Publications
Greater Flexibility to Charge Retirement Plan Expenses to Participant Accounts
New Department of Labor (“DOL”) guidance provides significant flexibility in charging plan expenses to participant accounts under defined contribution retirement plans, such as 401(k) plans. As a result of this guidance, plan sponsors looking to reduce costs are likely to charge to participants some plan expenses that they now pay themselves, and plan fiduciaries may change how expenses currently charged to participants are allocated.
In Field Assistance Bulletin 2003-3, the DOL:
• Approves charging some expenses to participant accounts on a per capita basis (as an equal dollar amount per participant), rather than as a percentage of each participant’s account balance,
• Allows certain expenses to be charged to a particular participant’s account, rather than spread over all participants (the DOL reverses its prior position to permit plans to charge individual participants for the cost of determining whether domestic relations orders are qualified); and
• Permits plan expenses to be charged to terminated vested participants that are paid by the employer for other participants.
Permissible Per Capita Charges
The DOL indicates that, in the absence of plan provisions specifying a method of charging expenses, plan fiduciaries have discretion in how expenses are allocated to participant accounts. As with other fiduciary decisions under the Employee Retirement Income Security Act of 1974 (“ERISA”), fiduciaries must act prudently and solely in the interest of plan participants. In deciding how expenses are to be charged, the DOL indicates that the plan fiduciary “weighs the competing interests of various classes of the plan’s participants and the effects of various allocation methods on those interests.” As a result of that process, the fiduciary might decide on a rational method for allocating expenses that “disfavors” a particular class of participants. (Of course, plan fiduciaries may not choose an allocation method where their personal benefit is more than incidental.) While the guidance indicates that charging expenses in proportion to account balances in most cases would be an equitable method of allocating expenses, a fiduciary might instead decide that a per capita charge is appropriate for fixed administrative expenses, such as:
• Recordkeeping
• Legal
• Auditing
• Annual reporting
• Claims processing and administration.
• Legal
• Auditing
• Annual reporting
• Claims processing and administration.
It would not be appropriate, however, to charge participants on a per capita basis for expenses, such as investment management fees, that are based on account balances.
The fiduciary would decide in each case the prudent method of charging participant accounts. However, to the extent that the plan documents specify an expense allocation method, plan fiduciaries are bound to follow it, as long as the method is consistent with ERISA. Thus, plan sponsors may want to spell out in the plan document how the various expenses are to be charged.
Permissible Charges to Individual Participant Accounts
Consistent with this new flexibility, the DOL guidance also addresses charging plan expenses to a particular participant’s account, and specifically indicates that such individual charges might be justified for:
• Expenses for investment advice (the DOL also indicates that expenses for investment advice services might be charged on a pro rata or per capita basis, without regard to actual utilization of the services)
• Expenses of effecting hardship withdrawals
• Expenses of calculating benefits payable under different distribution options • Expenses for benefit distributions (such as monthly check writing)
• Expenses for determining whether a domestic relations order or a medical child support order is a “qualified” order – a “QDRO” or a “QMCSO.” This guidance reverses the DOL’s prior position that the costs of QDRO determinations could not be charged directly to the account of the affected participant.
• Expenses of effecting hardship withdrawals
• Expenses of calculating benefits payable under different distribution options • Expenses for benefit distributions (such as monthly check writing)
• Expenses for determining whether a domestic relations order or a medical child support order is a “qualified” order – a “QDRO” or a “QMCSO.” This guidance reverses the DOL’s prior position that the costs of QDRO determinations could not be charged directly to the account of the affected participant.
Other similar expenses might also be charged to particular participant accounts.
Greater Charges Possible for Terminated Vested Accounts
The DOL guidance would allow a plan to charge expenses to the accounts of terminated vested participants, even though those expenses are paid by the employer for active participants. This guidance is likely to encourage plan sponsors to pass through to former employees some of the cost of maintaining their accounts where they leave their moneys in the plan. Under IRS regulations, however, the charges could not be such as to constitute a “significant detriment” to participants continuing to maintain their accounts under the plan after termination of employmentโthe IRS has indicated informally that this may be an issue for employers that want to impose these charges.
Summary Plan Descriptions Must Disclose Charges
The DOL indicates that plans are required to include a summary of fees and charges that might reduce benefits. Thus, a plan changing its expense allocation procedures should apprise participants of fees and charges that may affect their benefits through a “summary of material modifications.”
In all cases, the DOL reiterates that expenses can only be charged to participant accounts if (1) the expenses relate to the plan (and are not instead expenses for services for the employer or another plan), and (2) are reasonable in amount relative to the services performed.