Can litigation expenses be paid from plan assets?

[Guest Grumpy455]

A client sponsors a qualified retirement plan. The plan has been sued by a former employee over a benefit issue (the former employee is a plan participant)--all administrative remedies have been exhausted. We are the plan's TPA. The client wants all of the defense costs to be paid from plan assets (the defense costs are mounting and will soon equal 10% of the plan's total assets).

My first question is whether a defense cost is the type of expense that can be paid from plan assets (the issue does not concern whether the plan is qualified--the issue concerns whether the participant is entitled to benefit A or benefit B)?

If defense costs may be paid from plan assets, my second question is whether there are any limitations on such payment--e.g., may the defense costs be paid from plan assets only so long as they are reasonable (whatever that might mean)? Thanks so much for your help.

[Effen]

I think the DOL gave some guidance on expenses. there are lots of old threads on the various boards that you might want to read. Search for "Settlor" and you will find a bunch.

My initial reaction is they can't, but I don't have anything to back it up.

[mbozek]

I think that legal expenses related to defending the plan against a claim for benefits can be paid from plan assets if the plan permits such expense to be paid. However, I dont know what benefit the employer gets since the expenses will reduce plan assets and increase employer contributions to the plan.

[Guest Grumpy455]

The plan is a defined contribution plan so the only thing that is happening is that the plan's assets are being drained. I should have been clearer in my original message.

[mbozek]

An individual account plan can provide for adjustment of a participants' accounts for plan expenses. However there is a queston of whether it is prudent to continue litigation of a claim which will reduce participant's accounts by 10%. Your client needs to talk to counsel.

[Don Levit]

It would be important to determine where the alleged fault lies.

Was this disagreement due to the negligence of a particular fiduciary?

If so, the fiduciary, as opposed to the plan, may be personally liable.

What is specifically alleged by the plaintiff?

Don Levit

[Guest Grumpy455]

This is a DC plan that provides annuities. Initially, the plaintiff was not provided with an annuity payment option as a result of an administrative error--this plan's administration was, at the time, done in house, i.e., the company took care of the plan's administation and did not farm it out to a TPA. Now our firm does the administration--we are a TPA. Anyway, the plan has gone back, as part of a VCR application, and offered the plaintiff an annuity (a single life annuity) which the plaintiff has accepted. The plaintiff claims that that amount of the annuity payment is incorrect (too little) because the plan did not do a good job in locating a "reasonably" priced annuity contract. So the plan and the plaintiff are arguing over what is a reasonably priced annuity contract. We are in the pre-litigation stages at the moment, but the discovery costs are really growing as the plaintiff requests more and more documentation and the plan is forced to pay a lawyer to do this and that in response.

[mbozek]

Could you please explain what the parties hope to achieve by litigating this case? What does the employee want as a remedy? An annuity which will pay a greater amount each month than the amount of the annuity offerred? If so then why not come up with a value for the difference and pay the employee? What does the plan fiduciary hope to gain? Vindication that the choice was reasonable? Does the plan fidiciary think that it will collect its legal fees from the participant if the claim is denied? If the plan loses the case it could be forced to pay the participant's legal fees as well as the amount awarded for the bnefefits. The plan fiduciary could be sued by the remaining participants for failure to act in a prudent manner in administering the plan and wasting plan assets. This case is proof of the adage that a bad settlement costs less than a good lawyer.

[Guest Grumpy455]

Let's assume that the case settles and the plan's legal costs, at that time, were $15,000. The plan's total assets are about $135,000. Can the entire cost be passed along to the plan? Even though the mistake that led to the issue was caused by the employer during the time that it self-administered the plan?

[stephen]

I am not sure of the stance of the DOL but if I were a participant in this plan and the employer made me pay for the attorneys fees from my retirement account I imagine I would be contacting the DOL to find out their opionion.

[Belgarath]

While the attached may possibly be of some use to you, you've already received the best answer: seek legal counsel!

(Of course, the employer could just pay the legal fees, but then this question wouldn't be coming up...)

http://www.dol.gov/ebsa/regs/aos/ao2001-01a.html