Plan Sponsor Bankruptcy - Deduction/Charging of Fees by Service Provider

[Guest CaptainMarvel]

Has anyone ever dealt with a situation like this: We are a service provider & record-keeper for a 401(k) plan. We bill the plan sponsor record-keeping fees quarterly pursuant to a service agreement with the plan sponsor; this service agreement also states that if payment is not made within a specified time period we can deduct the record-keeping fees directly from plan assets. We also collect contract asset charges monthly and directly from the plan assets (i.e., the various separate accounts where the plan invests its assets). The latter charges are specified in a group annuity contract which is issued to the plan itself.

The plan sponsor filed for Chapter 11 bankruptcy several months ago. Since then, we have continued to charge and get paid by the sponsor our quartlery record-keeping fees, and we have continued to deduct the contract asset charges each month. We recently received a letter from a law firm that represents the plan sponsor in its bankruptcy proceeding. They are demanding that we return the record-keeping fees and contract asset charges we've collected from the plan sponsor since the bankruptcy filing.

As I see it, because it is clear that retirement plan assets are not part of the bankruptcy estate, we have a very strong argument that we are entitled to keep these fees and charges. All of the fees and charges would have either been paid directly from plan assets, or if paid from the plan sponsor, for the benefit of the plan. Has anyone ever dealt with a situation similar to this? Particularly from a service provider/record-keeper perspective?

Thanks in advance.

[Peter Gulia]

While I don't presume to give you advice, here's a few business suggestions for you to consider as you seek advice:

(1) If you haven't already, retain a lawyer to help you deal with bankruptcy and insolvency situations.

(2) Without necessarily changing the recordkeeper's entitlement to its fee, consider that it matters which person pays the fee. A recordkeeper's fee paid from the plan's assets leaves more value in the bankruptcy estate for the bankruptcy allocation among all of the debtor's creditors. For example, in Enron's bankruptcy, the court refused to grant Enron permission to pay the fees of the retirement plans' service providers; rather, each plan paid.

(3) If the request for a return of fees is merely a request (and not a court order or otherwise required by law), ask for your lawyer's advice about whether to suggest that you'll pay a return the next business day after you've collected that amount as a payment from the plan's assets.

(4) Ask your lawyer for advice about whether you should file one or more proofs of claim in the bankruptcy proceedings.

(5) Consider that the recordkeeper might hold a negotiating chip: if you're not satisfied, you might end your agreement and deliver the records to the appropriate plan fiduciary. A credible threat that you might do so might persuade the plan fiduciaries that it makes sense to pay you.

(6) Get your lawyer's advice about whether the portion of your fees paid by the insurance company must or should be treated differently than the other portions of your fees. It seems doubtful that the debtor should get a "return" of something that it didn't pay.

[Bird]

They are demanding that we return the record-keeping fees and contract asset charges we've collected from the plan sponsor since the bankruptcy filing.

But the contract asset charges were collected from the plan, not the plan sponsor, right?

As I see it, because it is clear that retirement plan assets are not part of the bankruptcy estate, we have a very strong argument that we are entitled to keep these fees and charges. All of the fees and charges would have either been paid directly from plan assets, or if paid from the plan sponsor, for the benefit of the plan. Has anyone ever dealt with a situation similar to this? Particularly from a service provider/record-keeper perspective?

You're right, I don't see how anything paid from the plan is relevant to their claim. I'm not sure about the charges that were actually paid by the sponsor; if they have a legit claim to them then it could be that you'd have to return them, but then could turn around and get the money from the plan. But the reality is that they are almost certainly just blowing smoke with a shotgun approach; you'll probably have to get your own attorney to blow smoke back at them, which is unfortunate, but that's the way it works.

[J Simmons]

But the reality is that they are almost certainly just blowing smoke with a shotgun approach; you'll probably have to get your own attorney to blow smoke back at them, which is unfortunate, but that's the way it works.

I for one, a smoke blower, nominate this for quote of the year on BenefitsLink. Thanks, Bird, for this delightful prose.