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Fees to former participants


ombskid

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For several years we have used fees to former participants to get them to move their assets - rollover or whatever. We used a nominal $100/yr - hoping that would be enough to get them to move.

We're finding it often is not working - they get a letter each year, they do nothing, and we remove the $100 to cover some employer costs.

Does anybody know if there is any guidance on how much is allowable. One employer wants to up the charge to $250 - still just to get them to move.

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How is that not a violation of fiduciary standards (not to mention the possibility that what the sponsor wants to do is for the sponsor's benefit and not that of the participants)? Certainly, it would seem to be hard (if not impossible) to justify charging larger fees to terminated participants than to ongoing active participants. You only get to charge participants reasonable and necessary expenses. How would this be necessary?

How big is the plan? Is this related to trying to hold the number of participants down to avoid needing an auditor's report? Even if it is, I don't think you get to discriminate against terminated participants to force them out.

Always check with your actuary first!

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Keep in mind that you cannot charge fees to terminated particpants as such. You can charge fees to participants, and the employer can pay the fees with respect to employees. That means the plan must have a real expenses that really get paid. The real expenses determine what can be charged.

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Keep in mind that you cannot charge fees to terminated particpants as such. You can charge fees to participants, and the employer can pay the fees with respect to employees. That means the plan must have a real expenses that really get paid. The real expenses determine what can be charged.

And if the sponsor picks up the fees for the actives, it is particularly important that the terminated participants not be charged more than a fair share. The sponsor does not get to save on some of the fees they pick up for the actives by passing some of those fees on to the terminated people. It is not a system to be gamed by the plan sponsor (who owes a fiduciary duty to the terminated people no less than to the actives).

Always check with your actuary first!

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The original $100 per former participant was less than the actual cost of the plan per participant - including tpa fees, ERISA bond, fiduciaty liability insurance - all documented costs. So the sponsor was charging formers less than the amount it was paying for current employees.

If the new amount - whatever it is - is not more than the cost per participant, then there should be no problem, correct?

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There is a DOL opinion that allows a plan sponsor to charge fees only to former employees who have account balances in 401k plan but that amount can only be assessed pro rata based on the plan costs which are not settlor expenses. E.g. if there are 40 accounts in the plan, 10 terminated participants and plan costs are $4000 the 10 terminated participants can be charged $100 each for a total of $1000.

mjb

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  • 6 years later...
On 7/20/2015 at 2:20 PM, My 2 cents said:

How is that not a violation of fiduciary standards (not to mention the possibility that what the sponsor wants to do is for the sponsor's benefit and not that of the participants)? Certainly, it would seem to be hard (if not impossible) to justify charging larger fees to terminated participants than to ongoing active participants. You only get to charge participants reasonable and necessary expenses. How would this be necessary?

How big is the plan? Is this related to trying to hold the number of participants down to avoid needing an auditor's report? Even if it is, I don't think you get to discriminate against terminated participants to force them out.

The observation on the purpose of the additional fee is important; viz., "the possibility that what the sponsor wants to do is for the sponsor's benefit and not that of the participants". 

 

On 7/20/2015 at 1:30 PM, ombskid said:

For several years we have used fees to former participants to get them to move their assets - rollover or whatever. We used a nominal $100/yr - hoping that would be enough to get them to move.

We're finding it often is not working - they get a letter each year, they do nothing, and we remove the $100 to cover some employer costs.

Does anybody know if there is any guidance on how much is allowable. One employer wants to up the charge to $250 - still just to get them to move.

Take this mind experiment: The employer charges $250 "just to get [the TV Partcipants] to move." Say there are 25 active employee participants and 10 terminated vested participants. The new fee raises $2,5

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Just now, Double Whitehouse said:

The observation on the purpose of the additional fee is important; viz., "the possibility that what the sponsor wants to do is for the sponsor's benefit and not that of the participants". 

 

Take this mind experiment: The employer charges $250 "just to get [the TV Partcipants] to move." Say there are 25 active employee participants and 10 terminated vested participants. The new fee raises $2,5

Take these mind experiments for situations in which the employer charges $250 "just to get [the T.V. Participants] to move" and there are 25 active employee participants and 10 terminated vested participants. The new fee raises $2,500.  The Plan holds $2,600,000 in assets. The T.V. account balances range from $6,000 to $16,000, with an average of $10,000; and the active employee Participant account (including executives) balances range from $100 (for one new participant) to $100,000, with an average of $100,000.

Before the new charge, the Recordkeeper charged:

a) $100 a participant ($100 x 35) or $3,500, with all revenue sharing fees from mutual funds returned to participant accounts

b) 13 basis points on assets, or $3,380, with all revenue sharing fees from mutual funds returned to participant accounts.  

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  • 2 months later...

Would an acceptable workaround be for the Employer to provide let's say a $120 Profit Sharing contribution to every employee as of 12/31 annually. Although it would be Profit Sharing, in a roundabout way it would reimburse the past 12 months of fees. Terminated participants wouldn't receive the Profit Sharing. The $120 would be tested, but would probably pass since it's a level amount, or that's my guess.

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