Peter Gulia

If: the purpose and scope of the review is to review the plan’s or its administrator’s agreements with providers of services used for the plan’s administration, that review is reasonably needed for the plan’s administration, the fee is no more than reasonable compensation for the services rendered, incurring the expense is not contrary to the plan’s governing documents, and the responsible fiduciary loyally and prudently incurs that expense for the exclusive purpose of providing the plan’s benefits to participants and their beneficiaries, it ought to be an expense a fiduciary could pay from plan assets. For some partial subregulatory guidance: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2001-01a https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/settlor-expense-guidance

When I advised a charity that preferred not to be involved in claims decisions, we got each provider’s contract obligation that it will decide all claims without asking the employer for anything beyond furnishing factual information (not discretionary findings) the employer has and the provider reasonably needs. For an IRC § 403(b) non-plan, the trick is to get each provider’s obligation before the employer permits the provider “to publicize [its]products to employees” and before accepting a wage-reduction agreement that would specify a contribution to the provider. Likewise, the employer would avoid being a party to, or otherwise adopting or approving, an agreement, plan, or other writing that states, or without the employer’s assent could be amended to include, a contrary provision. Such a constraint narrows the available investment and service providers. If the employer had not obtained role-limiting provisions, a participant’s claim can result in the hard place Belgarath describes. Many employers, unwittingly or reluctantly, do things that establish or maintain a plan. And many businesspeople don’t understand that what an employer intended as a non-plan became a plan. Enforcement is almost none until a participant’s surviving spouse discovers the spouse was not named as the participant’s beneficiary (and learns that, if the plan is ERISA-governed, the beneficiary designation might be invalid). Even then, not everyone pursues it.

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.

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.

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?

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?

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?

Does the “written plan” for the § 403(b) plan refer to the collective-bargaining agreement or collective-discussion document so that the other document is a part of the § 403(b) plan? If there is a defect, a sound resolution would call for coordination about tax law and labor-relations law. If the public-schools employer does not use the same law firm for both, the employer should want the firms to collaborate. If you’re a service provider on this situation, consider asking the school business officer to instruct the law firms to receive information from you. (That’s if your contact wants to deal with the weakness.) Without your help, lawyers who lack practical experience with payroll and retirement plan administration might render advice that doesn’t meet the employer’s fully considered needs. Consider also that the employer might prefer not to get into this. While doing what’s needed to protect your work, try to avoid unnecessary writings that could make it easier for a State or local government auditor or an IRS examiner to spot a defect. Even if the problem is obviously not your fault, your firm might be blamed or punished.

Gilmore, thank you for the helpful information.

When the plan’s administrator is an organization (for example, the corporation, limited-liability company, or registered partnership that is the plan’s sponsor), does anyone affix as the signature, however “manual”, a signature of the organization’s name—for example, Worldwide Widget Company—rather than a human’s name?

BG5150, thank you.

Bird, thank you for your further observation. I too often see forms that use extraneous text, and ask for more items of information than is needed to decide the claim.

Is this a defined-benefit plan or an individual-account (defined-contribution) plan? About the years for which you suppose the plan had no participant beyond the owner and her spouse: Was there a former employee who had an accrued benefit, even if not yet nonforfeitable, more than $0.00? Did 2008/2009 or 2017/2018 have a partial termination? If so, does it affect the administrator’s count of whether there was a participant beyond the owner and her spouse?

The reporting is less about that code 1-or-2 point and more about whether the church plan’s administrator or withholding agent reports a distribution’s taxable amount. Some get a church’s designation of an amount of retirement pay that could be treated as an IRC § 107 parsonage allowance and information from the minister, and use those to report a taxable amount less than the gross distribution amount. But many find that the reporter is “unable to reasonably obtain the data needed to compute the taxable amount”, and mark box 2b as “taxable amount not determined”. The minister then reports on Form 1040 the amount the minister finds is the taxable portion of her distribution. It might not matter that a 1099-R displays a code that would alert the IRS to look for a too-early tax if the distribution’s taxable amount is $0.

JOH, I suggested to the requesting officer that it might be unwise for the university to spend its money (no matter how inexpensively I would do the task) if the vendors’ forms are adequate. Further, even if I would write the form as a freebie, I’m still thinking through potential disadvantages. While I’m waiting for information about why the university might want a distinct form, I seek BenefitsLink neighbors’ observations about whether it’s a good idea or bad idea. Beyond a claimant’s burden of filing-out duplicate forms (and the employer/administrator’s burden of reviewing duplicate forms), is there some other disadvantage to using a form besides the investment vendor’s form?

Thank you for your helpful perspective. Is a vendor's hardship form one you consider inadequate?

When I was inside counsel to a big recordkeeper, I saw this problem often, especially with healthcare employers. If the § 403(b) and § 401(k) plans’ investment alternatives are identical (or nearly so) and one recordkeeper serves both plans, there might be a straightforward correction. Even if the facts allow an ERISA § 403(c)(2) mistake-of-fact return to the employer, it can be unhappy because it’s work—often four layers of computations and reprocessing—and the employer can be exposed to restoring investment breakages that resulted from the employer’s mistake. Instead, the recordkeeper corrects both plans’ records (including for each affected individual account) so every account and subaccount shows the correct number of investment fund shares. There is no payment of money, only corrections of records of beneficial ownership of investment fund shares. (I assume neither plan had shareholder-of-record ownership.) Done methodically and thoroughly, all records will remain in perfect balance. Employers instructed these records changes without seeking any IRS approval. Of those that later attracted attention (in the 1990s there was a wave of IRS audits of big healthcare systems), the IRS accepted what was done. For most, the IRS examiner without hesitation accepted what was done. For a few, I persuaded the examiner or supervisor that an employee could not have an elective deferral under a plan to the extent she was ineligible to so participate, and that the employer could not have made a contribution allocable to what could not have been an elective deferral. Under equity law, a person or entity does not keep property if it in good conscience belongs to another.

A university maintains an ERISA-governed § 403(b) plan, and is the plan’s administrator. The plan allows a choice of three investment vendors—TIAA-CREF, Fidelity, and Vanguard. The plan has no common recordkeeper; each vendor keeps records to the extent a participant uses the vendor’s annuity contract or custodial account. The plan provides hardship distributions, using only the Treasury rule’s deemed needs. The university asked me to write a form on which a participant would specify which of the deemed needs is the claimant’s reason for the requested hardship distribution. The university knows a vendor has its forms, yet asks for this form besides the vendors’ forms. Completing this form would not relieve a participant from completing her vendor’s form. Is a plan-level hardship form a good idea or a bad idea?

Although it won't help for what was done in the past, government agency requests of the kind nancy describes are another reason plan administrators might consider the new electronic disclosure opportunities, including with employees who become former employees. The computers make lots of records.

Yes; but it fits the assumptions embedded in Ellie's query.

That a distribution is attributable to a subaccount other than the distributee’s elective-deferral subaccount does not make it one a distributee could not on her tax return treat as a coronavirus-related distribution if it otherwise meets those conditions.

What is the plan’s definition for an hour of service? Does it include an hour for which an employee is paid (or entitled to payment) “on account of a period of time during which no duties are performed” because of a layoff? 29 C.F.R. § 2530.200b-2(a)(2) https://www.ecfr.gov/cgi-bin/text-idx?SID=41f0127c8a6a1ed75938128d32b82deb&mc=true&node=se29.9.2530_1200b_62&rgn=div8

If a plan provides any coronavirus-related distribution, whether the plan restricts it to an elective-deferrals subaccount or allows it from other subaccounts is the plan sponsor's decision.

If the plan’s administrator that erred is the employer (and it would pay into the plan the mistaken-payment amount): Are the economic consequence for the employer of retroactively making the benefit nonforfeitable and of not getting restoration from the distributees who received an unentitled benefit not much different (over time)?

Thank you, everyone, for crowd-sourcing these lists. To answer Erik Read’s query: A retirement plan’s administrator may, beginning July 27, furnish routine* ERISA-required disclosures under the Labor department’s Default Electronic Disclosure rule. (There are distinctions between which can be included in a yearly notice of internet availability, and which require a distinct pointer or delivery.) Further, some guess the Treasury might publish a rule or subregulatory guidance to say Labor’s regime is good enough for notices tax law requires (for whatever Treasury’s guidance doesn’t yet allow). * The ERISA rule does not provide its safe-harbor treatment for furnishing on-request items. However, some consider it reasonable to respond to an emailed request with an email response. A response might state the administrator’s presumption that it need not send a paper copy for a document furnished as a .pdf attached to an email.