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Can a participant pay her adviser’s fees from her plan account?


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Informal poll and query for BenefitsLink readers:

 

Considering only individual-account (defined-contribution) retirement plans that provide participant-directed investment:

 

Does a plan with its recordkeeper’s or TPA’s help permit a participant to charge against the participant’s account the fees of an investment adviser unaffiliated with the recordkeeper or TPA?

 

  • Always

  • Often

  • Sometimes

  • Seldom

  • Never

 

When a recordkeeper or TPA allows such an opportunity, what conditions are imposed?

 

What, if anything, does the recordkeeper or TPA require the adviser to sign to be recognized for a plan’s payment regime?

 

Does the regime for paying an unaffiliated adviser’s fee allow any rate the participant instructs, or is there an upper limit?

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I've never seen that done.  But I would have to guess the Plan Administrator would have to have some sort of rubric to determine if the fees are reasonable.  I don't think the participant can deem what's reasonable, because it's not really the participant's account; it's the trust's account.

I don't think the r/k or the TPA can require the adviser to sign anything.  It would be an agreement with the Plan Administrator/trustee and the adviser.  Maybe the r/k and or TPA would have an agreement with the sponsor to request the fees get paid out of the accounts.

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BG5150 and C.B. Zeller, thank you.

C.B. Zeller, for a plan that has no brokerage feature and restricts a participant's choice to core designated investment alternatives, have you ever seen an arrangement for paying an unaffiliated investment adviser at the participant's instruction?

And other BenefitsLink commenters?

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I think C.B. Zeller's question is the pertinent question - how is it a plan-related expense? I'm sure countless participants have outside advisors/financial planners but the work they are doing and fees they are charging have no direct relation to the qualified plan sponsored by the participant's employer. I have never seen an arrangement like this and I would advise the Plan Administrator against allowing it - but that is just a humble TPA's take.

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Hmmm- I also do not recall seeing this. But I can see a reasonable basis for it. Suppose a plan does allow only core investments. A participant could still reasonably want an investment advisor (whom they know and trust) to advise them on which core investments to use, asset allocation strategy, etc., etc...

Administratively, I haven't considered what might be involved. 

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Thank you, everyone, for the further observations.

 

In my experience (which includes hundreds of PWBA/EBSA investigations), I’ve never seen a Labor department investigator question whether advising a participant about how to direct investment for her plan account is a necessary service that plan assets can pay for.

 

And the IRS in letter rulings decided that redemptions to pay the reasonable fees of a participant’s adviser are not distributions (and not reported on Form 1099-R) because they are plan-administration expenses.

 

(At least three regulators—EBSA, IRS, and SEC—look for whether the payment arrangement is sufficiently documented, and for whether the adviser’s fees are reasonable, disclosed, and reported.)

 

Some recordkeepers routinely pay, as instructed, the fees of an investment adviser affiliated with the recordkeeper.  For example, Great-West (a/k/a Empower Retirement) will pay fees if the investment adviser is Great-West’s affiliate Advised Assets Group, LLC.  Likewise, Fidelity Management Trust Company will do it if the participant’s adviser is Fidelity Personal and Workplace Advisors LLC or another FMR affiliate.

 

So far, I’ve found few recordkeepers provide payment arrangements for investment advisers unaffiliated with the recordkeeper.

 

I assume a directed trustee would want (1) the plan administrator’s or other named fiduciary’s approval; (2) the participant’s or beneficiary’s direction and instructions; and (3) the investment adviser’s warranties that the adviser is and will remain adequately registered; the fees are reasonable and sufficiently disclosed; and all conditions for a prohibited-transaction exemption are met.

 

Does anyone know whether John Hancock, The Principal, or other providers will pay (assuming satisfactory instructions) fees of unaffiliated investment advisers?

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I imagine most recordkeepers are not terribly incentivized to make it easy to accommodate this arrangement. However in my experience there is usually a way to get the recordkeeper to at least issue a check to the plan sponsor (without creating a 1099-R) which the sponsor could then use to pay the service provider, if the recordkeeper would not pay the service provider directly.

Is there a 404a-5 issue? With an affiliated advisor, the fee schedule will be known in advance and can be disclosed to participants. In this hypothetical, I grant that the spirit of 404a-5 is not violated, since clearly the participant who hired the advisor would be aware of their fee arrangement. But I do not think there is any exception to the disclosure rule just because the participant negotiated the fees themselves.

If the participant hiring the independent advisor is an HCE, is there a BRF issue to consider? Particularly if non-HCEs would be unable to find an independent advisor willing to manage their small account balances.

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Because C.B. Zeller and others are generous in helping me, I thought I’d explain a way to resolve the 404a-5 question. 
 

I concur that no exception under the 404a-5 rule results because an individual incurred (or even negotiated) the fee.  Rather, I think it’s feasible to state the disclosure the rule calls for.

 

ERISA’s 404a-5 rule recognizes some expenses not apportioned among all individuals’ accounts.

 

The yearly disclosure must include “an explanation of any fees and expenses that may be charged against the individual account of a participant or beneficiary on an individual, rather than on a plan-wide, basis ([for example], fees attendant to processing plan loans or qualified domestic relations orders, fees for investment advice, . . .) and which are not reflected in the total annual operating expenses of any designated investment alternative.”  29 C.F.R. § 2550.404a-5(c)(3)(i)(A).

 

For that explanation, one could write:

 

If you hire an investment adviser to manage your individual account or advise you about how to direct investment, we may pay your adviser’s fees you instruct us to pay, and would charge your account for those payments.

 

Quarterly statements must show “[t]he dollar amount of the fees and expenses described in paragraph (c)(3)(i)(A) of this section that are actually charged (whether by liquidating shares or deducting dollars) during the preceding quarter to the participant’s or beneficiary’s account for individual services[.]”

 

But a yearly disclosure might explain an individual-incurred expense by a narrative, rather than specifying an amount, rate, or formula, especially for an expense not in the plan administrator’s knowledge.

 

When a text includes a purpose statement, one may interpret the text according to its purpose.  The rule describes its purpose as enabling directing participants, beneficiaries, and alternate payees “to make informed decisions with regard to the management of their individual accounts.”  29 C.F.R. § 2550.404a-5(a).  If an expense is charged only according to a directing individual’s instruction to pay the fee, it seem reasonable to presume the individual had the information she stated in her instruction.

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Peter, doesn't the Plan Administrator still have the responsibility to protect the participant from unreasonable fees?

What if the "adviser" is charging 250 basis points for his or her "advice" whereas the other participants aren't charged anything by the plan's adviser?

How can the PA determine if the 250 bps are worthwhile?

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If ERISA § 404(c) applies, a fiduciary is not “liable for any loss, or by reason of any breach, which results from [a directing participant’s or beneficiary’s] exercise of control.”  29 C.F.R. § 2550.404c-1(a)(1).

 

However, a plan does not fail to provide an opportunity for a participant, beneficiary, or alternate payee to exercise control over his or her individual account merely because the plan permits a fiduciary to decline to implement an instruction that would result in a non-exempt prohibited transaction.

 

Because the conditions of the ERISA § 408(b)(2) exemption (or another prohibited-transaction exemption) include that the plan pays no more than reasonable compensation, a plan’s administrator might set an outer limit on a fee the plan’s directed trustee will pay under a directing participant’s, beneficiary’s, or alternate payee’s instruction.

 

If a fiduciary sets such a limit, whether to draw the line at 250 bps, 150 bps, or something else involves risk-management and other practical choices.  A fiduciary might prefer to set a limit so it imposes no more constraint than the fiduciary can show does no more than avoid a nonexempt prohibited transaction.

 

Of course, any of this supposes the plan’s fiduciaries decided to allow an instruction to pay an investment adviser’s fee.

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