Plan Expenses

[Guest Ralph]

Can plan assets be used to pay for a fund search?

Can plan assets be used to pay for a recordkeeper search?

If the party that has been hired to do the searches is a fiduciary to the plan, how will this impact your answer?

[Guest rmeigs]

I’m not aware of any specific guidance on these two items, but in my opinion, plan assets can be used to pay for both of these. Both are a necessary part of administering the plan.

The law firm of Kilpatrick Stockton LLP has provided some good guidelines:

Sponsors who wish to have their plans pay expenses must follow the rules:

* Make sure the plan document permits the plan to pay administrative expenses.

* Realize that the decision to cause a plan to pay expenses is a fiduciary decision, and that the ERISA fiduciary standards (e.g., prudence) must be satisfied.

* Ensure that the expense is reasonable and necessary for plan administration.

* If the plan is paying a party in interest (other than a fiduciary or employer), ensure that the service is necessary, and that the contract and compensation are reasonable.

* If the plan is paying a fiduciary, make sure that the fiduciary either did not make the decision to retain itself or that the fiduciary is only reimbursed for direct expenses.

* If the plan is paying the employer, make sure that the plan is only reimbursing the employer for its direct expenses and that the payment is for plan administration, not a settlor function.

* Be aware that Labor Department investigators (and private plaintiffs) may view the expenses differently than you do. Be prepared to defend close decisions. An opinion of counsel, while not a complete defense, demonstrates careful analysis and may make the difference in a close case.

* Document decisions made with respect to plan expenses to demonstrate that the fiduciary rules are followed and the proper level of care is taken with respect to expenses paid by the plan.

[Jon Chambers]

I agree that there are differences of opinions regarding the topic. One school of thought holds that setting the plan up is a settlor function, while maintaining it isn't. Using this rationale, an initial fund search should not be paid for with plan assets, while a search for a replacement fund to take the place of a prudently selected fund that, for whatever reason, is no longer desirable, would be o.k.

Personally, I take the conservative position that recordkeeper searches should never be paid for with plan assets. This is because the recordkeeper primarily serves the plan sponsor, so selection of this provider is a settlor responsibility. I understand that reasonable people disagree with this conclusion, and that the DOL has not opined definitively either way.

One thing to watch out for is search "consultants" that also accept finders fees or other compensation from plan providers. If the consultant is a fiduciary, takes fees from the plan, and also accepts compensation from a provider, it certainly would look like a conflict of interest and possible PT.

[MWeddell]

While the DOL hasn't indicated whether fees for searching for replacement recordkeeper and fund managers could legally be paid from the trust, it has indicated that prudently selecting service providers is a fiduciary duty. I'd typically view these search fees as part of the reasonable cost of plan administration, although this is a judgment issue so I'm not surprised to see others post differing opinions.

[Kirk Maldonado]

Although it is a close call, I tend to agree with MWeddell.

[Jon Chambers]

In conducting many recordkeeper searches, I find that some of the plan sponsor's most common objectives are to reduce recordkeeping costs that are paid by the sponsor, to shift administrative responsibilities from the plan sponsor to the recordkeeper, or to shift costs from the sponsor to the plan participants. Since these scenarios clearly benefit the settlor, but don't necessarily benefit the participant, I think that the settlor should pay the cost. Certainly, there may be other examples and other conclusions, and, at the end of the day, it may be a facts and circumstances determination. But since the cost of a vendor search is not huge (generally, sponsors reduce their annual recordkeeping cost by significantly more than the cost of conducting the search), why run the risk of committing a fiduciary breach? That's my opinion on the issue anyway, I respect the opinions of those who disagree.

[Kirk Maldonado]

I agree with Jon, if the express purpose of the search is to reduce the employer's expenses .

On the other hand, if the search is simply to find out who provides the best service at a reasonable cost, I'm not so sure that I agree.

However, I don't know how you could differentiate the two in actual practice, because few employers would want to engage incompetent TPAs, simply because they are cheaper.