Administration Distribution Fees

[Guest TLCPension]

After recently leaving an administrative software firm where the system is not only programmed to pull an administrative fee for distributions but is also programmed to pull directly from the participants assets rather than the plan, I am now calling into questions whether or not this is permissable. I know a large portion of administrators process this fee? Is this correct? More importantly, if this is acceptable, when the participant has a vested account balance of less than the administrative fee, can that fee be charged?

[R. Butler]

Its debatable.

Those that argue it is not acceptable generally base their arguement on PWBA Opinion Letter 94-32A, which dealt with QDRO expenses being charged directly to the participant. The opinion essentially stated that a Plan can't charge the participant for a benefit he/she is entitled to under ERISA.

Those that argue that it is acceptable reason that such expenses can be charged to the Plan and it is more equitable to charge the fee directly to the participant.

If you agree that the fees can be charged directly to the participant, I don't see why the fee would have to waived for participants with nominal balances. The issue is whether it should be charged at all.

[alanm]

A distribution is a mandated ERISA right and a fee charged directly to the participant is not allowed. However, daily valued accounts, 404c self directed investment features, expanded investment options greater than the three required by EIRSA are not mandated benefits and a fee can be charged to the participant's account when extra work is incurred posting residual dividends and removing the account from the system and web. Therefore, if your plan has daily valued accounts, I would change the fee to be a "404c account closing fee" and not charge for the mandated rights of calculationg vesting and writing the check.

[MWeddell]

I advise clients against charging to participants' own accounts fees for processing distributions (excluding in-service withdrawals). It's debatable as an earlier poster said, but not a fight I'd want to choose.

However, one could be more aggressive. Even if the 1994 QDRO opinion letter is followed, note that distributions are only required by law after the participant reaches age 65 per Code Section 401(a)(14) and the parallel ERISA provision. Processing distributions prior to that time is still rendering a service not mandated by law.

[Guest TLCPension]

Is it acceptable to charge a $10 tracking/finding fee to these participants with less than the $3500 we are trying to liquidate out of the plan to the individual participants who we don't have current address information for?

[maverick]

At the annual conference back in '96 or '97, ASPA posed the following question:

"Is there anything on point which says the plan can't have a participant pay for the cost of the termination paperwork charged by an administrative firm? So, for example, if the charge to the plan/sponsor for handling the termination processing is $100, can the participant's account be debited for this charge or is this a violation of the participant's ERISA rights?

For example, a bank is charging a $15 fee for cutting a check for a terminated participant, which is being paid by reducing the account balance of the participant. Apparently, the DOL audited the plan a year ago and never raised this as in issue."

The IRS response:

"This is a DOL issue. We would think that this is a problem. It might also be an IRS concern as an impermissible forfeiture."

I don't know if there is anything more current on this issue.

[IRC401]

1. I have never seen a plan in which "404©" was an option. It is always imposed. In such cases the distinction between a 404© closing fee and a distribution fee is a matter of semanitcs.

In addition, if the fee isn't disclosed up front, there is an issue whether the plan sponsor blew the 404© protections for not disclosing all of the fees.

2. A plan may not need to offer distributions upon termination of employment, but if it does so, a participant has a right to a distribution. If imposing a distirbution fee is a prohibited transaction it shouldn't matter whether the distribution is at age 30 or 65.

3. Last year the DoL raised the distribution fee issue in an audit of a former client of mine. Because I changed jobs, I may never find out what happens(ed).

[Medusa]

We have some clients that have instructed us to deduct the distribution fee from the terminating participant's account. Some of these clients have now been pulled into a DOL audit program. The text of the DOL's initial results letter is as follows:

The assessment of this fee directly against the participant's accounts violates the sponsor's duty of fariness and impartiality found in ERISA 404(a)(1)(A).  Participants who leave thier plans after only a short period of time are disproportionately affected by this fee.  For example, a participant whose account balance is only $150 will receive a distribution of $41 ($101 termination fee; $8 check writing fee).  However, a participant whose account balance is $5000 will receive a distribution of $4891.  Clearly, the participant in the second example, who presumably participated in the plan for a longer period of time, is less affected by this fee, whereas the participant with less amount of time in the plan, is disproportionately harmed by this fee.  Section 404(a)(1)(A) requires that fiduciaries act in the best interest of all participants and beneficiaries and act to defray reasonable costs of administrating the plan. Imposing this burden disproportionately on plan participants and beneficiaries does not meet this obligation.

Interestingly, the issue of imposing an obstacle to exercising an ERISA right was not raised at all.

Will let you know how these audits progress.

[KJohnson]

At the ASPA and ABA conferences, there are also DOL Q&A's. Here is their response to this question over the last three years:

QUESTION 8.

Can a retirement plan charge participants' accounts (directly) the cost of issuing a check to the participant?

DEPARTMENT OF LABOR ANSWER.

2000 Answer: Staff is examining this and so is not prepared to answer. We should expect guidance in the not too distant future.

2001 Answer: Staff said it is still working on the guidance. This year, however, staff offered a few clues about its position. Staff observed that the relevant issue in this situation, as in connection with PWBA's published guidance on the costs engendered in a plan's DRO/QDRO review, is whether or not an imposed plan charge to the participant "burdens a statutory right." It is that issue that impedes a positive staff approval of the proposed response.

2002 Answer--The issues raised by this example continue to be under active review by the Department. The Department indicated that, while there was internal agreement regarding many of the issues, a final decision has not been reached.

[mbozek]

There are collateral considertions which need to be reviewed:

1. ERISA section 510 provides for participant claims against any person ( e.g., employer, plan admin, etc) who discriminates against a participant/bene for exercising any right to which the participant is entitled to under the plan (distributions). This could include disproportionate charges assessed on participants.

2. Even legitimate charges permitted under ERISA can be a breach of fiduciary duty if not disclosed to participants. See Corely v. Hetcht Co.

[Kirk Maldonado]

Mbozek:

I agree with your comment on Corley.

However, it is hard to imagine that a Section 510 violation could occur when the charges are levied against all participants. Section 510 talks about discrimination, and there wouldn't be any here.

Admittedly, Section 510 also contains other language about fines, etc. Nevertheless, I wouldn't be worried about a Section 510 charge.

[mbozek]

Kirk: Discrimination is in the eye of the beholder. Isn't the 510 issue just another way of expressing the DOL allegation of imprudence as stated in Medusa's post? One could argue that a fee of $100 on a 500 dollar balance (20%) is discriminatory when compared to a distribution of $5,000 (2%). Isnt "disproportionate harm" just another way of saying discrimination? If there is no discrimination can an employer impose any fee on employees so as to avoid having to incure any cost of plan administration, e.g $200, 500 even if it consumes the entire account balance? Until confirmed by a decision of the Sup ct, only Potter Stewart thought that a fiduciary/employer could be held liable to participants under section 501 (a) of ERISA for making false statements regarding a plan. As a movie character used to ask criminals "Do you feel lucky today?" I know this position opens up a can of worms to fiduciaries and their counsel but this isuse will evolve to litigation as employers continue to shift the costs of plan administraton/ operation to employees without regard to ERISA.

[IRC401]

There is an issue that I have never seen raised.

In certain cases participants are required to receive certain minimum allocations (such as safe harbor plans, top heavy plans, and plans needing to pass the "gateway test"). It seems to me that if an employee is entitled to a certain minimum allocation in order for the plan to satisfy some regulatory requirement, the employee is entitled to the minimum allocation calculated after allowing for the distribution fee.

If I am correct, the employee would be entitled to one distribution fee, not an annual allocation of one. On the other hand, depending on the facts, the employer may be able to argue that the distribution fee is paid out of sources of funds not subject to the minimum allocation requirements.

[Mike Preston]

One is allocations. The other is net earnings and expenses. I don't see the connection at all.

[Kirk Maldonado]

Mbozek:

I tdidn't say that there wasn't any potential problem under ERISA; I just said I wasn't too worried about being charged with a Section 510 violation.

[IRC401]

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If you owe someone 3% and charge him $50 to collect the 3%, have you given him the 3%???? I don't think so.

[R. Butler]

IRC401,

I agree with Mike Preston, they are not related issues.

I may not be following your position correctly, but based on your logic it seems that no fees, distribution or otherwise, would be allowed to be charged against a participant who receives only a top minimum contribution.

[Mike Preston]

Actually, since fees and expenses are just a specialized version of investment earnings, the logic would say that one's account balance couldn't be charged with investment losses, either. I don't buy it.

[four01kman]

Maybe I'm missing something here. My argument on not imposing a distribution charge on the participant is that distributions from the plan are a settlor function. You cannot operate a qualified plan without having distributions.

[Mike Preston]

Wow. Things sure are getting confused.

four01kman: I don't think that fees for processing distributions are settlor functions. There is no question that reasonable fees for distributions can be charged to the plan. However, that is not a comment on whether those fees can be appropriately charged directly to an individual's account for that individual's distribution. I, personally, have a problem with charging them directly to the individual. That doesn't mean I support the concept that they are settlor functions.

Similarly, I do not support the concept that an appropriate allocation fees can't be charged to an individual that has an account balance consisting exclusively of the top-heavy minimum benefit. Again, I don't think there is any question about this.

The only question is whether the fees in question can be applied directly to an individual's account. If, instead, applied as an overall expense of operating the plan, they can be charged on a pro-rata basis to all participants, IMO.