DB Plan Fees

[BFree]

We read all the time about 401(k) plan fees - what is acceptable to be paid from the plan, the affect of loads or other service fees, etc.

What about DB plan fees? Are they not an issue because of the nature of the benefit given to participants (that is, participants need not be interested in fees because it has no bearing on their ultimate benefits)?

I assume plan trustees are faced with same issues as with dc plans. Correct?

Any insight is appreciated.

[david rigby]

That is my understanding as well. Since there is no investment/expense risk being born by plan participants, this issue gets less attention, but I think the same rules would apply. Also of note is the "risk" born by the PBGC, so it should not be considered irrelevant.

[mwyatt]

Also, think about ultimate plan termination where participants will be sharing in some portion of excess assets: fees paid obviously will have an impact on the level of excess assets. Of course, one difference between DB plans and DC plans is that if the employer does make a habit of settling allowable expenses from the trust, the actuary will make an assumption for expenses (so that the contribution paid will be higher than if the employer paid all expenses directly). DC domain has no allowance for expense load in employer contribution (although I did see a takeover Target Benefit plan one time that included a 5% expense assumption in determining the contribution - amazing).

[Guest Barge Girl]

I clipped an article out of Employee Benefits News magazine which I frequently refer to in determining what fees I can charge to our defined benefit plans. The article states the DOL is "zoning in" on what it considers inappropriate or excessive plan fees being charged to large defined benefit plans. Some examples included charges for IRS & DOL penalties, fees charged for studies of whether to terminate a plan or convert it to cash balance, and fees for financial assessments of changes to the benefit structure. Fees for recordkeeping, prep of form 5500, and fees for financial statements and audits are deemed appropriate.

The article appeared in the January, 2001 edition and is entitled "DOL levies big fines for excessive plan fees" by Jill Elswick.

[BFree]

What about investment advisory fees? Are they typically an allowable expense?

If your plan had say, $175 million in it, and had expenses of $400,000, would you conisder those fees out-of-line with the norm? (I know that much of this depends on the particular facts and circumstances - I'm just looking for opinions).

Thanks.

[Guest Barge Girl]

Our investment advisory fees are charged through the trust. However, the article doesn't specifically address these types of fees. A lot of times I think fees are a "hidden" expense in that they are taken directly from the assets (thereby reducing the earnings.)

Another thing the article mentions is checking your plan document to make sure it permits charging fees against the plan.

If you would like me too, I'd be more than happy to fax you the article.

[mbozek]

The issue of what fees can be charged to the plan has been going on for at least 15 years. The DOL has issued numerous rulings which state that settlor expenses which primarily benefit the employer, e.g, plan terminaton expenses or studies of cost of a conversion to a cash balance plan, cannot be charged to plan assets while fees that benefit the plan participants such as adoption of amendments to maintain qualified status can be charged to plan. Investment fees are chargeable to the plan assets because they maintain the ability of the plan to pay benefits but the fees must be reasonable for the work performed. There is a 2001 DOL opinion and examples available on the PWBA website for those that are interested. Some of the distinctions in the examples appear to be arbitrary. The issue of what fees can be charged to the plan is separate from the issue of what expenses can be deducted by the employer under IRC 404.

[Guest HarveyC]

ERISA Section 408(B)(2) allows for the payment by a plan to a party in interest (the company, for example) for office space or services if such items are necessary to the plan, pursuant to a reasonable agreement, and for reasonable compensation.

It should be permissible that the salaries (or a percentage thereof) of those performing plan administrative functions be payable from the plan. What about the allocated time for management personnel that attend pension committee meetings (and only pertaining to those topics that are payable from the plan, ie not plan design issues)? Anybody have any thoughts on this?

[mbozek]

The DOL has issued rulings on this issue holding that actual time spent by employees in plan administration as well as related costs, phone calls, postage etc. can be charged to the plan provided that the employer keeps detailed records of the activities and the costs. Most employers cannot comply with the detailed recordkeeping. I dont know if cost spent on professional meetings can be charged to the plan because the DOL might say that it really benefits the employer. Need to review Dol rulings on this issue at the DOL web site.

[Guest Barge Girl]

Another article on the DOL's take on plan fees...the link to this article was in the Benefitslink newsletter today....here it is if you don't get the newsletter....

The article is "The Perils of Misallocating Plan Costs" by Virginia Munger Kahn

Business Finance Magazine

[mbozek]

The article points out all of the uncertainies in charging to plan for expenses. Which leads to the question why should an employer go beyond the basics which are accepted, e.g., amendments required for qualification, fees by actuaries, accountants, investment advisors, since it is very difficult to provide the level of documentation/reasonableness required by the DOL to justify paying administration expenses from DB assets (can a portion of the rental cost/utilities be allocated to the Plan?). The problem lies in the practice of the treating HR departments as profit centers who are required to manage costs and demonstrate profits.