Jump to content

are flat fees reasonable


TPApril

Recommended Posts

Company is assessed by recordkeeper a flat fee per participant for administration of 401k plan. Company in turn wants to charge this back to the plan as a flat fee per participant rather than proportionate to account balance. %age-wise, this can be significant (not reasonable) for a new participant who defers minimally based on NHCE wages to the plan. How is this generally approached?

Link to comment
Share on other sites

It's a judgement call that needs to be made by the appropriate plan fiduciary. DOL FAB 2003-3 may help.

http://www.dol.gov/ebsa/regs/fab_2003-3.html

One issue we struggled with was what to do about participants who either have no balance or have a balance less than the per capita fee. The per participant portion of our administration fee counts all participants, regardless of balance. If the per participant fee is $X, is it reasonable to charge those with balances $X + $Y, so the plan will pay the entire per participant portion of the fee? The conclusion we reached was that it would not be reasonable to charge a participant more than what we charge per participant when other participants did not have a balance available to pay their fees. For our clients that have us allocate the per participant portion of our fee per capita to each participant, the client is billed the amount that can not be paid by participants' accounts. Since it is a judgement call, I'm sure other firms might do it differently.

Link to comment
Share on other sites

I have seen plans that charge the flat fee on balances over a given number-- say $1,000. So if the flat fee tended to work out to $15/person the highest perecentage of 1.5%.

For the rest of the fees either the sponsor paid them. Since the HCEs all had large balances no discrimination issues.

I had one client that just spread the remaining fees across everyone so the lower balance people paid something. This did mean that the 1,000 and larger balances were paying two sets of fees. This was a very large plan with large balances so the amount of the 2nd layer tended to not be very material.

You could obviously play with these numbers setting the cut off line at $500 or $1,500.

I also has one client just do the flat fee thing up to 100% of a person's balance. It was rare a single fee allocation would wipe a person out. But as interest rates dropped the people who were in the money market fund always had a neg earnings because of this policy. We talked and wrote many letters warning this client that was very risky. It also hurt the ADP test as lower paid employees quickly learned they couldn't save money in the plan as the fees were taking too large of a bite from their balances.

Link to comment
Share on other sites

Thank you for the helpful input. What do you think of an administration fee that is determined based on assets, but then converted to be charged as a per-capita fee rather than prorata fee?

i haven't put tons of thought in it but to use a fee allocation method that would shift a fee from the high balances to the low balances seems unwise. That shift seems is the net effect of what you are proposing. It would seem even less wise if the HCEs are the one's with the high balance accounts as it would reduce their fees and increase the NHCE's fees.

Link to comment
Share on other sites

Another useful quote from the FAB:

Further, in the case where the fiduciary is also a plan participant, the selection of the method of allocation may raise issues under the prohibited transaction provisions of section 406 of ERISA where the benefit to the fiduciary is more than merely incidental.(8

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...