401K termination upon bankruptcy - administrator fees

[Guest motti]

My wife's company went bankrupt and the judge ordered chapter 7. The lawyer who was nominated to dissolve the company became the plan administrator and got the judge's approval to use the plan's money to pay her legal fee to terminate the plan. As the company hardly has any assets it became clear that the lawyer intends of milking the most from the plan. Objections of plan participants or even attempt to place a pre-determined cap on the fees were rejected by the judge.

Does anyone know what applicable ERISA or bakruptcy law explicitly allow or forbid tapping into the plan's participants' money for that purpose ?

We feel that this is hiway robbery in the middle of the day with full endorsement of the court.

Thanks for any relevant info.

[QDROphile]

Operation and termination of a retirement plan involves expenses. Expenses of a plan must be paid either from plan assets or by the employer. Evidently, the bankruptcy court determined that assets of the employer would not be available for plan expenses, which is not surprising.

I am surprised that the lawyer that is performing services for the plan termination agreed to be the plan administrator. That could be interpreted as an extraordinary move for the benefit of the participants because the lawyer will be subject to the rules governing fiduciaries. Among other things, those rules prevent a fiduciary from being paid more than a fair amount for services, so the lawyer will be subject to more direct scrutiny and exposed to greater risk of challenge.

I expect that the circumstances are disappointing and frustrating for the employees and plan particpants in many ways and that participants will suffer some loss of benefits compared to what would have happened if the employer had not gone bankrupt. But I would not presume that the arrangements are designed to milk the plan. If the plan is not properly operated and terminated, the substantial tax benefits of the plan could be jeopardized. If you have reason to think otherwise, the participants should monitor the accountings and object if expenses charged to the plan are inappropriate.

[Guest motti]

My wife's company went bankrupt and the judge ordered chapter 7. The lawyer who was nominated to dissolve the company became the plan administrator and got the judge's approval to use the plan's money to pay her legal fee to terminate the plan. As the company hardly has any assets it became clear that the lawyer intends of milking the most from the plan. Objections of plan participants or even attempt to place a pre-determined cap on the fees were rejected by the judge.

Does anyone know what applicable ERISA or bakruptcy law explicitly allow or forbid tapping into the plan's participants' money for that purpose ?

We feel that this is hiway robbery in the middle of the day with full endorsement of the court.

Thanks for any relevant info.

Thank QDROphile for your informative response. The thing that I still don't understand is how my wife's plan money (in an individual 401K plan) can become an asset for paying the debtor's obligations - i.e., the plan termination. If indeed so, is there a way to limit and control the lawyers fee (whose interest obvoiusly conflicts with my wife's). Is there a point in involving the Dept of labor in the case ?

Thanks again.

[QDROphile]

You are correct that some expenses of plan termination are obligations of the plan sponsor; other expenses are plan expenses. I cannot speak to the propriety of requiring the plan to pay all expenses ina bankruptcy situation, but I note that, by definition, the company is is not covering all of its obligations and choices have to be made about which of the creditors bears the burden.

[Guest motti]

You are correct that some expenses of plan termination are obligations of the plan sponsor; other expenses are plan expenses. I cannot speak to the propriety of requiring the plan to pay all expenses ina bankruptcy situation, but I note that, by definition, the company is is not covering all of its obligations and choices have to be made about which of the creditors bears the burden.

[Guest motti]

In the event that assets of the employer are found. Do plan administrator fees have priority over other creditors in this case?

Thanks

[RCK]

Plan assets should only be used to pay the plan's expenses, including I suppose the termination of the plan. But they should not be used to pay any of those other costs in conneciton with the dissolution of the company. If you have seen or heard anything to the contrary, I would encourage that your wife (not you) and other participants contact the local DOL office. My experience is that their level of interest rises geometrically with the number of calls/letters that they get.

http://www.dol.gov/ebsa/AboutEBSA/org_chart.html#section13