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Lumpsum deduction of 401k administrative fees


Guest ennemm

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Guest death and taxes

Since the administrator charged fees for several quarters all at once, is it posssible that your account bore more than it should have due to other participants being paid out before their account was charged? If the administrator had been timely in charging the accounts, it is possible that your "loss" wouldn't be as great. This sounds like a breach of fiduciary duty.

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Corely v. Hecht Co., 530 F Supp 1155 -Failure to disclose to participants that employer advances to cover group LI premiums in a contributory plan were to be repaid to employer from future dividends was a breach of fiduciary duty. Also see Pegram v. Herdrich, 120 S. Ct. 2143, 2154, N. 8 for dicta on this issue.

mjb

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The point raised by Death and Taxes could hurt, instead of help, you. Specifically, if the adminstrative fees were spread over the account balances of a number of participants who weren't in the plan for all of the prior quarters, they shouldn't get a full allocation of the prior expenses. Thus, this could cause the amount allocated to your account to increase.

Kirk Maldonado

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Guest death and taxes

I agree with Kirk. I was thinking that perhaps you were paying for distributions of participants who were paid out before fees were taken. Participants could have received a benefit without having any fees taken out of their balance since the fee charge was so delinquent. If distribution calculation fees are part of the fees charged, you are now sharing in the fees that should have been allocated to those people who have already been paid.

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Guest ennemm

Update: I have persuaded DOL to take some interest after posing some questions thanks to helpful suggestions from many of you, though I do not know how what level of help I can expect.

After I sent DOL the last quarterly statement, the one with a lump sum fee deduction shown as "loss", and also the emails from TPA stating those are admin fees AND are being shown as losses because "that is the way they list them" and that "they are not required to inform me on any fees", DOL asked for more info including earlier quarterly statements and the details on the money market fund in question including past performance, fees and the contact person for the fund etc. which I gladly faxed. DOL personnel do seem stretched out in terms of workload, or so was the impression I was given.

Death And Taxes, the plan sponsor only telephonically admitted that "they did not communicate well to participants" but stopped there, refusing to share any blame or admitting any breach of fiduciary duty. My main gripe was just that since I could have easily rolled over my 401k last year itself with advance knowledge on impending fee deduction. Kirk Maldonado's point on fee spread on shrunk participant group may well be the fact. I revisited the SPD which seems absolutely devoid of any mention of fees.

MBOZEK, thanks for further pointers to DOL regs on fees and on employers' duties on disclosure. Though DOL process is slow, at least they seem somewhat interested. Is it advisable to attempt filing a claim with TPA/sponsor at this juncture or just wait for DOL to act / conclude ?

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Guest death and taxes

I hope you get some action from the DOL. These things are slow, though. My thought regarding breach of fiduciary duty is that, for example, the plan has 25 participants on 1/1/01 and 10 people are paid benefits by 6/30/02; the admin discovers no fees have been charged for 18 months and assesses all past fees on the 6/30/02 valuation; you then request your benefit and have been charged fees which should have been shared by the 10 people who have already received their benefit. It isn't in the best interest of the remaining participants to shoulder all of the expenses of the participants who were paid without paying fees. I think that consistutes breach of fiduciary duty.

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You have nothing to lose by filing a cliam with Plan admin. Indeed I dont think they will be inclined to turn you down because they will have to state the reason for deducting the fee in writing and cite the plan provison that justifies such a fee and the denial could beused by the DOL in any investigation of the plan. It is more likely that the Plan Admin will try to avoid having to make a decision but all claims must generally be answered in 120 days.

mjb

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  • 4 weeks later...

The Final (Penultimate?) Chapter:

DOL, in its investigation repeatedly asked for my SSN (as they

kept losing or used wrong ones for some reason!) to find info on

my money market fund acct and also took down the contact# for TPA

etc, but concluded that they can do nothing, reportedly based on

this letter from TPA to DOL:

[color=green]Per your request, this letter will provide you with an explanationfor the loss showing on Mr.(myname)'s June 30,2002 statement of account.Our corporation provides administrative services for the abovereferenced plan. The plan incurs a fee in the mount of $3000/yearfor these services. The corporation paid all of the fees prior to7/1/2001, they were not paid out of the plan assets. per the employer'sinstructions and in accordance with the terms of the plan, the adminfees incurred from 7/1/2001 were deducted from plan assets as per:  Invoice period   Amount Deducted On07/1/01-09/30/01     $750   4/1/0210/1/01-12/30/01     $750   4/1/0201/1/02-03/30/02     $750   4/1/0204/1/02-06/30/02     $750   4/1/0207/1/02-10/30/02     $750   7/3/02These fees were deducted from participant accts on pro-rata basisbased on acct balance. On 3/31/2002 plan assets were $51092 andMr.(myname)'s acct balance was $17264, so the deduction of $1012showing on his 6/30/2002 statement are accurate.Pl note that these admin fees and expense rations of the mutual fundsthemselves were the only expenses that are deducted from plan assets.This plan also receives Investment Advisory services, and these feesare paid from the corporation.[/color]

As far as showing of deduction as loss instead of fees on acct

statement, DOL bought into the TPA's explanation that "TPA's

software does it that way" !

DOL did not think that $3k fees on 51K assets were excessive (6%!)

But advised me to seek an attorney to fight it in court if I wanted to.

Basically the shrinking pot theory was proved.

DOL agent said, the decision was made by her supervisors: case is closed.

They were not willing to discuss anything as to:

a) how did the employer's instructions to deduct retroactively are

"in accordance with the terms of the plan" ?

b) how come no notice of impending deductions was conveyed to the participants ?

A Question: What if everyone had started withdrawing and I were the

only (unlucky) participant with assets of $3000 left on 4/1/2002:

would I have lost my whole 401k account to these whimsical retroactive

deductions ?

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My apologies (I manually typed it as it was a fax).

pmacduff, you are right. I just corrected the dates.

All the year fields in the table except those of invoice

period of first two lines were incorrect and are corrected

to be '02. Same with those in the paragraph following the

table. Thanks for pointing this out.

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On the one hand, I have sympathy for your dismay. However, what this also shows is that the vast majority of the public does not know how expensive it is to administer these plans. Most participants get a "free ride" with the employer always paying these fees. It is just too bad that there is a minimum level of fees that are required, no matter how small the group is and that when it is allocated to the participants, that results in hefty individual amounts.

If everyone allocated the fees to the participants, there would be a huge walking away from using 401(k) plans (even with the tax advantages) and a shift towards investing directly in the market.

Those of us active in lobbying and working with Congress on new laws constantly stress the need for simplification. Congress has continually (for 2 decades) overlaid more and more complex rules on all retirement plans resulting in this high-fee situation. For many employers that can't afford to shoulder the fees, it means that they also do not offer any plan at all because they realize it would be absurd to pass on this level of fees to the participants (less than 50% of workers have any access to any type of plan).

We are about to get hit with another big layer of administrative burdens, with additional fees becoming necessary as Congress passes another pension reform act this fall. I only see it getting worse before it gets better (if ever).

And then if we "privatize" Social Security, you will be able to watch that account get fee deductions, too. The investment community is paying big campaign donations to see this happen.

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I fail to see how the admininstration of a plan for three participants which is invested in money market funds could generate $3000 in fees a year. Maybe some one could tell me how many hours is required to do the administrative work involved ( and describe what admin is really required other than a quarterly statement). By the way what do TPAs charge as an hourly fee? At $100 an hours thats 30 hours of work. ERISA only allows the payment of reasonable fees. It appears to me that the fiduciary did not do proper due dilligence in reviewing the fees and merely decided to pass them along to the participants who as a captive audience had no choice. This is the usual pattern when the fiduciary is also the owner of the business. There is no reason to maintain a qualified plan which has such an outrageous fee structure when an employer can establish a SEP or simple or just allow participants to establish their own IRAs. Investing directly in the market is not a bad option when you consider the that trades can be made for $10-15 each with no admin fees and capital gain for sales. Also the funds are available when you want it. But if it any consolation, the employees of Enron were screwed even more than ennemm.

mjb

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$3,000 for a terminating plan adds up pretty fast...

document updates, quarterly statements, 5500s, distribution packets to all those already paid, participant inquiries, uncooperative employer all add time

many TPAs charge more than $100/hour

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I don't have a problem with the Sponsor/Administrator paying the administration fees from the plan...what I have a problem with is one of ennemm's points (I think)...that once it was decided to begin paying admin fees from plan assets, they went back and deducted for the prior 9 months (3 quarters) admin fees and then began deducting at the start of each period. I think if the Plan Administrator/Trustees decided to begin paying fees from the plan on 07/01/01, then that's when they should have started. The fees would have come out evenly (dollar cost averaging works both ways, deposits and expenses). If, for some reason between the Employer, Investment firm, etc. wires got crossed and the fee deductions weren't initiated when they were supposed to be, I think that the fee deductions should have started at that point, not retroactively. If the Sponsor was that concerned about the fees, it would have seen to it that the deductions started July 1, 2001.

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BFREE: arent the most of processes you describe automated and entered on a data base to minimize the time? Secondly arent many of the expenses you mention, e.g., benefit packets, participant inquiries, distribution requests settlor expenses that cannot be charged to the plan? Q are 5500 costs a settlor obligation because it must be filed by the sponsor? I dont think plan can charge the employee to receive a benefit plan statement that is required to be given by law. The cost of document revisions can be passed along only if they affect the plans qualfied status. I think the problem is that some employers are trying to pass off all of the costs of operating their plans to their employees without regard to the DOL rules and dont whan to be responsible for any costs.

mjb

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MGB, free ride or not, my credit cards and banks always

inform me ahead of time of any changes in fee structure etc by a

"change in terms of agreement" that allows me to vote with my feet

if I don't like what I see coming. Why no such luck here ?

Why is an omitted fee structure and/or governing rules equate

to pretty much anything being allowed ? I have no problem with

any amount of fees, provided a reasonable prior notice and an

option to move out is there.

Also, what is with these retroactive fee deductions also being in

accordance, just because the plan sponsor authorized it ?

This is like banks charging you a fall below fee for past 10

years by retroactively changing the minimum balance required

to 100K for those years.

mbozek, the number of participants has not been disclosed (could

be more than 3), just that my share of the assets was about a third of

the total, has been revealed. Also, assets other than mine may have been

in accounts other than a money market fund (said my plan sponsor once)

What riled me was, that I had been patting myself on the back for

being astute in holding the 401k assets in cash acct, thereby avoiding

the negative returns that others (elsewhere) were experiencing, and

then I get smacked with this.

BFree, I can see how fees add up, but isn't a terminating plan

and its TPA akin to a company about to file bankruptcy and its CFO

(substitute CEO/COO etc) ? Company dying ? hmmm.... don't I deserve

that 0% loan ?

2muchstress, TPA's letter to DOL is so lame, in that it does

not even state the plan assets at each quartile -- as death and taxes

suggested, the burden should have been shared by exited participants

of previous quartiles as well.

I had asked DOL in writing on fees being shown as losses which

finds no mention in TPA's letter and instead DOL just bought

that verbal explanation from TPA that, thats how their software

works, notwithstanding that a "fees" column exists right above

the losses -- maybe I am not supposed to understand such

accounting intricacies ?

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ennemm: YOu should ask for a copy of the 5500 form the period in question, e.g. 2001 plan year if the plan was maintained on a calender year, to see what was reported as plan expenses to the DOL. Calender year 5500 must be filed by Oct 15, 2002. If expenses were not reported for any part of 2001 year then the participants should not be charged. A participant has the right to receive a copy of the 5500 form from the plan administrator. Also 5500 will tell you how many participants the plan had.

I have had several clients who though that they were doing the right thing by moving into safe investments in their 401(k) plan only to find out that their account balances were being reduced for plan charges passed along by the employer. Unlike an IRA owner, qualified plan participants are a captive audience for this kind of thing because they cannot transfer the funds while employed. Best advice to a former particpant is to rollover the account balance to an IRA as soon as possible to avoid such charges.

mjb

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Let me clarify what I did not say - I am not justifying paying the fees out of the plan; I am noting that the fee amount noted is not out in the stratosphere as some have suggested.

(And after the client requests and given a detailed description of the DOLs position on settlor expenses, we will charge them for it)

As far as getting into the nitty gritty of databases and automated processes - well, I don't know what exactly my lawyer or plumber does, but I pay their fees after agreeing to pay them. I wholeheartedly agree with the points made about it being the plan sponsor's responsibility to review fees on an ongoing basis.

I don't know what ennemm was asking in that last post. A point we, as TPAs, like to emphasize to both participants and employers is that nothing is free. In fact, terminating a plan creates additional costs above and beyond regular annual administration.

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"...Secondly arent many of the expenses you mention, e.g., benefit packets, participant inquiries, distribution requests settlor expenses that cannot be charged to the plan? Q are 5500 costs a settlor obligation because it must be filed by the sponsor?..."

I would disagree that any of these expenses are settlor expenses. Settlor expenses are not expenses incurred becasue the Plan Sponsor is meeting a DOL/IRS requirement, but rather just the opposite. A settlor expense results from voluntary acts of the Plan Sponsor (i.e. Establishment or termination of Plan, design studies, voluntary amendments, etc.) Assuming the fees are reasonable, I don't see why all of the expenses BFree lists could not be properly charged to the Plan.

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