Has anyone had any experience with amending a 401(k) plan so that all

[Guest TW2000]

Has anyone had any experience with amending a 401(k) plan so that all administrative expenses are paid out of plan assets? Would expenses be apportioned to participants on a per capita basis or according to percentage of total plan assets? What potential problems must a plan sponsor consider (i.e. notice to participants, decreased employee morale, decreased employee participation) in making a decision to pass administrative expenses on to plan participants? Any insights are appreciated.

[Guest Charlie Friday]

I'm not sure if this will help, but my firm will analyze your plan for fee recapturing opportunities. In other words, there may be various types of revenues available from the fund options, and they may be significant enough to avoid charging the participants.

[actuarysmith]

It is clearly possible to pay admin expenses from plan assets. Your thread does not state whether or not assets are pooled or allocated to individual accounts. Pooled accounts make this a little easier, but it is still possible to pull it off with allocated accounts.

I can't recall where I read it, but I believe there is a DOL letter somewhere that addresses this issue. Basically you are allowed to charge for items related to the ongoing admin and maintanance of the plan. You are not allowed to pay expenses related to the start-up or termination of plan.

In general, apportioning the charges accross the asset base (or account balances) would probably generate less "back lash" from participants. However, it may be possible to use a combination of both approaches (i.e a flat charge per participant plus a percentage of account balance.

The plan document needs to address the fact that plan assets are being used to pay plan expenses.

[Guest rmeigs]

The Profit Sharing/401k Council's last survey of 401k plans found that plans paid the investment management fees in 64.7% of plans in 1998, up from 61.2% in 1997. Trustee costs were paid by the plan in 34.8% of plans in 1998, up from 30.5% in 1997. Plans paid for all recordkeeping costs in 32.6% of companies, up from 26.4% in 1997. The trend towards the plan paying more or all expenses seems to be continuing in 1999 and 2000.

I've found that the best approach is to tie the fee change to some enhancement to the plan -- like expanded option or internet access. Create an exchange of value, i.e. I, as a participant, get a better plan at a small increase in cost.

[QDROphile]

It is dangerous to look at use of any amounts related to plan assets as not "charging participants." All of the revenues and revenue opportunities associated with the custody and investment of plan assets belong to the plan. In a defined contribution plan, all plan assets are allocated to participant accounts. So any amount that is used to pay expenses is charged to the paticipants in some way. It is certainly a good idea to explore revenue opportunities such a commission recapture, but don't kid yourself that you are not charging participants if the plan pays for something. To the extent of any payment, the participant accounts receive less than they would have if the employer had continued to cover the cost.

[Greg Judd]

Rick Meigs' post is most pertinent here. Sponsors are moving towards paying admin fees, not away.

Come the next market downdraft (the current 'calm''s probably not enough to spur participants to get outraged about fees), Congress will jump-start its inquiries into 401k fee shenanigans, & some sponsors will be scrambling to scrape the egg off their face (pun intended of course) while frying hard to retain participants in the face of the bad publicity.

Some asset managers have made noises about offering admin services for 'free' or near-free if your current assets are attractive enough, as a switching inducement. Haven't heard as much about this over the past few months, but I'd watch that carefully, too--nothing's free.

[Jon Chambers]

While I agree with most of the responses, I'd suggest that to determine whether the aggregate level of fees is appropriate, you need to benchmark total plan costs (including investment management, trustee and administrative fees) against peer plans. Note that numerous surveys indicate that investment management charges, which are almost always paid by participants, typically represent about 90% of total plan costs. If total plan costs are reasonable, and investment management charges are below average, it's possible to communicate to employees why costs are being shared, what industry standard practices are, and why the plan is still a good benefit. Without a complete understanding of plan costs, this can be difficult.

In terms of how plan costs are passed through, this varies by company, by type of provider, and by type of service. Most asset based charges (e.g. trustee fees) are allocated pro rata. Plan administrative charges (recordkeeping fees, compliance services, etc.) are charged through using both pro rata and by participant methods. Often, the provider's billing method dictates how these fees are charged through. Participant specific charges (e.g., loan administration) are typically charged to the participant.

You may be interested in reviewing our article, "Managing Your 401(k) Plan Fees", on our website, http://www.schultzcollins.com. Select the "Qualified Plans" button. And finally, I'd disagree somewhat with Greg Judd's comments--we're seeing many provider's offering zero admin cost 401(k) plans. Of course, he's right on his other comment. Nothing's really free, so the admin service is paid for through higher investment management fees.

[Greg Judd]

Originally posted by Jon Chambers

...finally, I'd disagree somewhat with Greg Judd's comments--we're seeing many provider's(sic)   offering zero admin cost 401(k) plans. Of course, he's right on his other comment. Nothing's really free, so the admin service is paid for through higher investment management fees.

[Edited by Greg Judd on 09-20-2000 at 02:46 PM]

[Jon Chambers]

The admin services are "free", in that the plan sponsor doesn't pay anything for them. Providing the service is still profitable for the vendor, in that the profitability on investment management makes up for the admin service that has been provided for free. Based on my understanding of the market, it appears that the "margin" on investment management is typically about 50 basis points (0.50%). Assuming an average account balance of $40,000, this translates to $200/participant of investment management margin available to subsidize admin costs. And it's not necessarily problematic if total investment management costs are reasonable. Where it becomes a problem is when the 50 basis points is layered on over and above a reasonable investment management fee. What's reasonable? That depends on the individual plan, and the services required. So is it "'free' admin services free, or merely free"? It depends how you look at it. I suggest simply that it can be misleading to look at admin costs in a vacuum, without considering investment management fees and possible subsidies.

[Kirk Maldonado]

I have seen some situations where the amount of fees taken out by the service providers was unconscionable. In one case, involving a plan with approximately $50,000,000 in assets, the annual fees exceeded 4% of the total assets of the plan.

Unbelievably, in this case the client wouldn't listen to my ERISA concerns about the excessive nature of the fees because his attitude was, since the employer wasn't writing a check for the amount of the fees, there were no fees. It may also have something to do with the fact that the person gaining the benefit from those fees was a personal friend of his.

[Greg Judd]

Originally posted by Jon Chambers

So is it "'free' admin services free, or merely free"? It depends how you look at it...

we agree, Jon. But you knew that....

Kirk, that situation you've described...hooo, man! That's called a 'heist' isn't it?

[Jon Chambers]

According to HR Investment Consultants' 401(k) Provider Directory Averages Book, an average 2000 life plan with $60,000,000 in assets (the closest I could find to Kirk's scenario) incurs total annual plan costs of 1.09%, with a range from 0.48% to 2.56%. So Kirk's example is more than 50% higher than the high end of the range. With potential conflict of interest issues as well, it's my sense that the client should have taken Kirk's advice and reviewed the arrangement. At a minimum, they should have documentation in the file supporting the decision that they made.

[Guest PLHart]

Unconscionable? Try unbelievable!

Kirk, are you sure that 4% charge was an annual fee and not the commission paid on annual contributions only, which would still be unconscionable but, unfortunately, believable given the scenario you explained (vendor friend of sponsor's)?

[Guest Jay Marran]

For plans that hold a menu of mutual funds, once plan assets reach the $75 - $100 million range, service fees paid by the fund companies should cover most or all of the RK and trustee fees. This is particularly true if all or part of the 12 b-1 fees can be captured for benefit of the plan.

Our larger plans (>$300 M) usually generate service fees more than sufficient to cover plan admin. expenses, with the excess normally allocated back to participants.

Give me a call at 800-458-9269 if you want to discuss.

Jay Marran

Security Trust Co.

[Carol V. Calhoun]

Gee, Kirk, you are SO cynical!

I would just add to this discussion that you have to make sure that the administrative expenses being paid by the plan are in fact expenses of the plan, not "settlor expenses" under the famous "Maldonado letter." (This part is, of course, NOT directed to Kirk, who can be assumed to be fully familiar with that letter. ) For example, recent ERISA Advisory opinions have held that expenses of amending a plan to maintain its qualification, or an audit of a plan's qualification, are in part settlor expenses, because having the plan qualified benefits the plan sponsor as well as the plan itself.

Another consideration arises with respect to attorneys' fees. If the plan is paying attorneys' fees, any attorney-client privilege could not be asserted against participants and beneficiaries of the plan, because they would be the "client."

Just a couple more issues to keep in mind.

[Guest BJGrenier]

The original question had to do with amending the plan to provide that all administrative expenses be paid out of the plan. There is a question as to what we mean by "administrative expenses." I think there would be a problem with providing that "all" administrative expenses be paid out of the plan. According to a recent article, the Labor Department in the Kansas City region has begun asking some employers to reimburse their retirement plans for thousands of dollars in expenses paid for with plan assets. Among the expenses at issue, according to the article, are those associated with the following:

(1) converting a defined benefit plan into a cash balance plan

(2) the cost associated with obtaining tax-favored status for a plan

(3) the costs of outsourcing the administrative functions

of a plan

(4) the cost of giving investors information about pension liabilities in annual financial statements.

Under the proposal of the Kansas City region, employers would be able to split some expenses with their plans, usually down the middle. These would include certain annual costs of maintaining and administering the plans, including non-discrimination testing. Apparently, this position is an outgrowth of guidance issued by the DOL in 1997 to the California Insurance Commissioner's office.

Many people are opposing these views of the DOL. Anyone have any recent information or developments on this?

[Guest T C Farnam]

Mr. Maldonado is being entirely too modest in this case. To return to the original questions, there are several items related to this topic which have been published, and one of the first was a 1987 DOL response to Kirk's questions about these issues.

I've just returned to the office from a presentation which covered this topic in some depth, suggest the following for guidance to those trying to amend plans in this respect:

1986 DOL Information Letter to John Erlenborn

1987 DOL Letter to Kirk Maldonado

ERISA Opinion Letter 97-03A

In addition, we have just acquired, about two hours ago, two pages of "Settlor Fees Discussion" from the Kansas City Regional office of PWBA. This is NOT an official position of the DOL, but might be of interest. We'd be willing to fax this upon request, as we have not gotten it scanned and converted to a PDF file yet.

TCF

[Erik Read]

In a lot of cases when your dealing with a bundled plan you have to remember that some fees come out prior to "ANYONE" seeing them - these are the fund fees, in several cases the fund families themselves are passing a portion of that fee directly back to the "investment advisor" or Recordkeeping Firm. I'm not saying that's good or bad, just that it needs to be taken into consideration when discussing total fees.

During the most recent ASPA Summer Conference the representative from the DOL mentioned that you'd have a hard time selling him under audit that a fund with identical performance to another but with twice the expense ratio was the better fiduciary choice. Watch those fund expenses in line with performance, and remember - there is no such thing as FREE anywhere - someone's paying someone to do business, these companies aren't just being nice for a referral source.

[Kirk Maldonado]

I would like to add a bit of additional clarification to Carol's response.

I agree that if the plan pays for the expense, there is no attorney-client privilege. However, that does not mean that if the employer pays the expense, then the attorney-client privilege is available. It only applies in very limited circumstances.

To be on the safe side, it is a good practice to assume that nothing is protected by the privilege. (I realize that this assertion involves a degree of overstatement, but not that much.)

[Carol V. Calhoun]

I agree with Kirk. Maintaining the attorney-client privilege in employee benefits matters is often extremely difficult, and indeed its availability at all can often depend on which court you are in. I was just trying to emphasize that you definitely lose it, even if it would otherwise be available, if you are paying fees out of plan assets.

[Guest rchambers]

I understand that the Kansas City Regional DOL Office has been looking very carefully at the allocation of administrative fees between defined contribution plans and the sponsor of the plans. I gather that there have been several audit settlements where the plan sponsor has agreed to recompense the plan for a portion of the fees that the DOL feels that the sponsor should have paid. Many of these are fees are ordinarily paid by most plans.

National Office of the DOL appears to be condoning this action.

[Dowist]

This seems like a good opportunity to recommend consultants (qualfied, competent etc.) to help plan sponsors review costs of administration.

We have the DOL/insurance/mutual fund expense disclosure form, but it is still very difficult for a plan sponsor to analyze costs - because of the many types of costs and providers (banks, insurance, mutual funds). A consultant with expertise in this area - and there are many out there - can make the cost analysis intelligible so that the sponsor will have some idea of what is reasonable and what is being provided for how much.

At some point it may be "routinely" considered imprudent if this sort of analysis is not done.

For any client with a plan with substantial assets (say $10 million plus) the analysis can save money and provide fiduciary protection (due diligence, procedural prudence) to the plan sponsor and other fiduciaries who select recordkeepers/trustees/investment managers. Also, the expenses of analyzing the costs would I think be payable from plan assets.

[alanm]

You can charge participants if it is allowed in the plan

document. The authority to do so is in PWBA opinion 97-03A

[KJohnson]

I've always viewed 97-03 as more cautionary that supportive of paying administrative expenses out of plan assets. I have always thought that the language regarding the need to hire an independent fiduciary for "mixed" settlor/fiduciary functions (such as plan qualification) not to be a "real world" analysis. However, as the rumblings out of Kansas City indicate, DOL is apparently serious about this issue. Here is a link to 97-03 if anyone is interested.

http://www.dol.gov/dol/pwba/public/program...ry97/97-03a.htm

Also, the following is a link to a 9th Circuit decision last year that discusses in detail the "fiduciary exception" to the attorney client privilege.

http://caselaw.findlaw.com/scripts/getcase...case&no=9710504