Question regarding allocation of plan expenses

[Guest VEBA Las Vegas]

In FAB 2003-3, the DOL provided guidance on allocating plan expenses between plan participants (as well as allocating expenses to individual participants). In the FAB, the DOL concluded that where a service provider's fees are determined based upon account balances (i.e., pro rata) a per capita distribution of those fees may be arbitrary.

Has anyone dealt with the converse to this conclusion? It seems the DOL favors pro rata distributions, so is it possible to allocate on a pro rata basis a service provider fee that is determined on a per capita basis? I strongly suspect the answer is not what I would like to hear, but I am curious as to whether anyone has dealt with this.

Thanks --

[Alf]

GREAT USERNAME!

I worry about fiduciary issues if a per-capita fee is allocated on an account balance basis, rather than discrimination issues. I would think that the DOL's objection from the example you cite in 2003-3 won't apply because the higher account balances are going to be highly compensated. It would generaly be anti-discriminatory, but what basis is there for allocating the expenses based on account balances?

[E as in ERISA]

You might argue that the vendor's methodology for calculating its fees should not be solely determinative of the method of allocation.

What if a bundled service provider offered two choices: (1) "Free" admin services if you also use their proprietary funds (they are compensated on a pro rata basis from the funds); or (2) $50 per participant admin fee if you don't use their proprietary funds (they are compensated at least partially on a per capita basis and possibly also receive some pro rata compensation from the funds).

Should the way that expenses are allocated really be based on whether you choose the bundled or unbundled arrangement?

In the first case, aren't the participants with higher balances really subsidizing those with lower balances? But isn't pro rata considered acceptable there?

So couldn't you logically argue that you could do the same in the second situation?

[Mike Preston]

I'm with Katherine. I think pro-rata fees are always acceptable, no matter how the charges are developed.

[Guest VEBA Las Vegas]

Thanks all. The reason for a pro rata allocation is administrative ease. Trustee has a system through which just about everything is allocated between participants on a pro rata basis. We ran across a vendor that bills on a per capita basis and, due to costs, etc., plan sponsor would prefer not to establish a separate allocation procedure for Trustee to allocate this expense.