Which fees can be charged to participants?

[Guest TBene]

When starting up a new 401(k) plan, which fees can be charged to participants?

In our first year we expect fees to include:

$2000 Set Up

$28 Per participant

$2,000 annual administration

$2,800 annual Trustee

$2250 non-discrimination tests

We expect 200-400 participants, assume $1.4million in assets

[Tom Poje]

Administrative expenses can be paid from trust assets.

what can not be done is to charge an individual a fee for processing a distribution. That could be considered as part of the admin expense and charged across the board.

in other words, if an ee quits with a $50 balance and you charge $50 to process distributions, you can't charge him the $50, thus resulting in a zero distribution. the $50 is across the board.

[Guest Marcus]

This is an an addendum to Tom Poje's reply:

You can not charge a participant for a distribution that the plan is required to make. Thus, even though the plan may allow for immediate distributions the plan may only require a distribution to be made at the later of age 65, 10th anniv of plan participation, or termination date. Therefore, for most participants that terminate prior to age 65, you can charge the participant directly for this request.

[stephen]

Can you charge the particpants for the $2,000 set-up cost? (I do not think so)

[This message has been edited by stephen (edited 01-27-99).]

[Guest Paul McDonald]

It was noted by the DOL in Opinion Letter 97-03A that it is a fiduciary determination as to whether to pay a particular expense out of plan assets. The fiduciary must act prudently and in the interest of the participants and beneficiaries of the plan and in accordance with the plan document and other instruments that govern the plan. Fiduciaries must assure that the payment of expenses is authorized by the plan, is in the best interests, and that the amount is reasonable. While the opinion letter dealt with plan termination expenses, the determination process appears to be you determine if the expense may be paid from plan assets and then determine if it is appropriate to charge that particular expense to the participant who incurred the expense.

The Title I of ERISA prohibition example dealt with the plan wishing to charge an attorney's expenses for determining the qualified status of a domestic relations order to the participant. The fees were so high for the review that it would be detrimental to make a claim for the QDRO right. For a participant who has terminated employment and has the option of taking a distribution prior to the ERISA dates, a fiduciary may make the determination that it is appropriate to charge this participant for any reasonable expenses incurred.

In Tom's example you wouldn't want to be the "last person out"!

In TBene's example it could result in all of the expenses being determined as eligible for payment from plan assets. The Set-up expenses related to plan document preparation, etc. would most likely be considered "settlor" functions but other so-called set-up expenses could be deemed administrative in nature. IMHO it is the fiduciary's call based on the powers that are given to them to make this determination.

[MWeddell]

Responding to the original post, a fiduciary could reasonably decide that all of those expenses are part of the reasonable cost of administering the plan and therefore pay from the trust.

Responding to a point raised in Paul McDonald's post above, ERISA requires that a plan have a written document, so a fidiciary might decide that time spent preparing the written document can be charged against the trust if it can be separated from time spent discussing what features will be in the plan, which is definitely a settlor function.

[Dawn Hafner]

There is a 1987 information letter from the DOL issued to Kirk Maldonado discussing in general which fees may be paid from the plan.

Generally plan set up fees such as design of the plan, termination of a plan, drafting of documents are considerd "settlor" functions for which the employer can reasonably be expected to pay for in the normal course of business. These "settlor" fees should not be paid from plan assets.

Operational expenses such as trustee fees, recordkeeping, reporting, and testing would be considered fees that the plan can pay.

See the ASPA C-3 Study Guide for a reprint of an article from an ALI-ABA course that discusses these issues.

[Wessex]

I'm not sure I agree with Marcus that "even though the plan may allow for immediate distributions the plan may only require a distribution to be made at the later of age 65, 10th anniv of plan participation, or termination date. Therefore, for most participants that terminate prior to age 65, you can charge the participant directly for this request." I don't believe that Section 401(a)(14) necessarily requires that payment be made at the specified time. Section 401(a)(14) mandates payment at that time "unless the participant elects otherwise." If a plan permits a participant to elect an earlier or later time, I see nothing to differentiate whether or not check processing fees can be deducted from payments made at any particular time. Under Marcus's analysis, it would seem that you could also charge participants who elect to delay beyond the 401(a)(14 date a check processing fee. This issue is also addressed in the message titled "1099 Reporting" last updated on 1/26/99. I took a look at the 5/19/97 issue of Pension & Benefits Week and the article reports on remarks attributed to Morton Klevan with the PBWA, although there were no direct quotes. The article states that "Processing distributions to participants who terminate employment is another example of a statutory right for which individuals cannot be charged. Mr. Klevan differentiated this from 'voluntary' plan features, such as participant loans and directed investment options, for which plans can charge reasonable expenses against a participant's account." Mr. Klevan's remarks were made at a conference, not in official PWBA guidance. It appears from the article that an IRS official was also at the conference and apparently did not voice any different opinion. I would like some more official sanction of check processing fees for distributions before I would advise that such fees were permissible.