Shaving a few basis points off plan participants’ annual returns on their retirement plan accounts can put a significant dent in their asset accumulations by the time they’re ready to retire. For that reason, the question of which plan expenses are charged to participants, and which must be borne by the plan sponsor, is a critical issue to resolve correctly. Improperly allocating expenses to participants could be a serious fiduciary breach. The good news is that there’s plenty of guidance on the matter.
Making the distinction
The basic dividing line is administrative vs. “settlor” functions, and their associated costs. The former can be charged to the plan, and the latter must be paid for by the plan sponsor. Here’s the distinction: Administrative expenses cover services that benefit the plan participants exclusively, and settlor expenses primarily benefit the sponsor. Also, expenses incurred to implement certain settlor expenses are administrative.
The distinction isn’t always clear-cut. And if participants derive some benefit from settlor services, a portion of the associated costs can be charged to the plan.
Unambiguous settlor functions include those incurred during the period the plan is being set up, such as plan design consulting and conducting provider searches. When the plan is operating, settlor expenses include the cost of amending the plan (when amendments are at your option, and not required by new laws or regulations), and costs associated with addressing regulatory issues. For example, if your plan document was found to be deficient by regulators, legal and consulting fees and penalties would be settlor expenses. So too would be costs associated with operational errors, such as missing IRS Form 5500 filing deadlines and failing to credit participant accounts on time.
Finally, if you terminate your plan, the associated legal and consulting fees would be settlor expenses.
Most other expenses you can think of are administrative, and thus can be paid from plan assets. In the plan start-up phase, that would include the cost of setting up participant accounts, including recordkeeping, billing and trust arrangements.
Ongoing operational services like custodial charges, participant recordkeeping, portfolio management, changing investment options, IRS Form 5500 preparation, discrimination testing, processing distributions and loans, audits, mailing statements, and mandatory plan amendments are all administrative.
Finally, certain charges associated with terminating a plan also can be charged to the plan. Those include investment surrender charges and plan provider contract termination fees.
Not all situations are cut-and-dried. The Department of Labor (DOL) has offered guidance, in the form of six fact patterns, to help plan sponsors categorize expenses properly. In one scenario, a plan sponsor decided to kill two birds with one stone by expanding the scope of its annual individualized retirement plan benefit statement sent to participants. In addition to the basic retirement plan statement, the employer added information about other programs, including the medical, dental and vision benefits, along with other programs such as its fitness center, annual picnic and holiday party. That more than doubled the cost of producing and distributing the booklet.
In the period prior to expanding the booklet, the employer charged its entire cost to the plan. But how much of the larger booklet could be charged? According to the DOL, “the plan sponsor should pay for that portion of the booklet that relates to non-plan matters.” It also noted those expenses must be “reasonable.” This suggests that a slick, glossy booklet might not be deemed reasonable, nor would one printed at an above-market price by a friend of the plan administrator.
The DOL said that the plan sponsor should “be given considerable deference regarding their disclosure decisions,” but must “be able to explain their disclosures and justify” the resulting costs.
In another scenario, a defined benefit plan sponsor amended its plan document to provide for a participant loan program and an early retirement window. During the same period, tax law changes took effect impacting all retirement plans. These events triggered four charges from different entities that took care of the work:
- The cost of amending the plan to comply with tax law changes,
- The cost of routine nondiscrimination testing,
- The cost of establishing the participant loan program, and
- The cost to amend the plan to create the early retirement window and obtain an IRS determination letter to gain the IRS’s blessings of that new plan design.
The DOL states that the first two items are administrative, because they’re operational in nature. The third is a settlor function, because the plan fiduciaries have “no implementation obligations under the plan until such time as the plan is amended.” And the fourth charge involves both settlor costs (amending the plan), and administrative costs (obtaining the determination letter, an implementation necessity following adoption of the plan amendment).
When in doubt
When in doubt about the appropriateness of charging a particular expense to your plan, it’s prudent to make sure it falls into the administrative category before doing so. While some expenses are easier to categorize than others, be sure to consult with your advisor if you have any concerns.