TNC + Fees

[Guest careful1]

Most of my clients have an end of year val date so I am just starting the 2009 valuations. Regarding adding plan expenses or fees to the TNC, my understanding is that right now there is no formal written guidance on exactly what type of fees or expenses must be included. Most of the plans I work on do not pay expenses from the trust. The trust will have some small amount of investment fees though. I was looking at some seminar notes and they seemed to say that if I netted the investment fees with the asset G/L for the ROR calc then it would not be necessary to add them to the TNC. Maybe I have that wrong, I'm not sure that makes sense to me, I am wondering what others are doing?

[SoCalActuary]

Your approach is historically correct. If an expense is incurred to create investment results, then it is not considered an administrative expense.

So the investment expenses go into the general gains & losses to be spread over 7 years.

Administrative expenses that occur on a regular yearly basis have no reason to be amortized. Beginning of year valuations should be making assumptions for the reasonable annual administrative expenses borne by the trust, and require annual contributions to cover them. If the expenses differ during the year, then they are gains or losses that can be amortized.

But in your discussion, end of year valuations will allow the actuary to know the actual administrative expenses, assuming proper accounting techniques are used. So I see an issue here. Consider the costs of document restatement, which will occur for most DB plans during 2010 or 2011. This is an expense that is not annually recurring in the normal sense of the word. It makes sense that this expense should not be paid by the trust in many plans, because it is a settler's function. But some plans have no choice to pay the document fees from the trust. If so, we have a problem with the fact that actual expenses are incurred during the year. Does the actuary just automatically charge the the target normal cost for full amount of those expenses, or just the reasonable and normal expenses?

Another example is the cost of litigation. Suppose that legal fees are charged to the trust for defending a distribution amount or for defense of a trustee. How does the actuary determine what expenses are properly charged in the TNC?

Interesting questions - no great answers - but worth more discussion.

[Guest careful1]

Thanks SoCal that is a very helpful response.

I too have considered actual vs assumed expenses when doing an EOY val but of course I don't have a good answer, although I think that until more guidance is issued, at a minimum, consistency is important.

[Andy the Actuary]

Could we impose an example, please. Calendar Year Plan, January 1 valuation. All distributions paid by Trust.

For 2009:

MV 1-1-2009 = $5,000,000

Benefit Distributions = ($200,000) (assume mid-year)

Actuarial, Legal, Accounting Paid By Trust = ($25,000) (assume mid-year)

Investment Management Fees Charged Directly rather than % = ($30,000) (assume mid-year)

Contributions = $400,000 (assume mid-year)

Net Investment Gain = $300,000

MV 12-31-2009 = $5,445,000

2009 Credit balance brought forward at $300,000 / [$5,000,000 +.5 x [$400,000 + ($200,000) + ($25,000) + ($30,000)]] = 5.91%

$25,000 + $30,000 = $55,000 reported on 2009 Schedule C, provided $30,000 not reported on Schedule A

2010 TNC includes $55,000 of expense.

However, are you suggesting that if 2009 Credit Balance brought forward (by netting investment expenses from ROI) at

[$300,000 - $30,000] / [$5,000,000 + .5 x [$5,000,000 + .5 x [$400,000 + ($200,000) + ($25,000)]] = 5.31%

Then, 2010 TNC includes only $25,000 of administrative expenses?

[SoCalActuary]

Yes, Andy, your second example is exactly what I meant. The $30,000 investment fee was directly related to the growth of plan assets, since it would not have been incurred using a different investment vendor.

[Andy the Actuary]

Yes, Andy, your second example is exactly what I meant. The $30,000 investment fee was directly related to the growth of plan assets, since it would not have been incurred using a different investment vendor.

Thank you.

The approach makes sense in that it treats such direct expense the same as an asset-based investment management fee. In short, administrative expense means administrative and not investment.

This is a little tricky because sometimes the trustee's fee are charged directly by the same institution who's making a direct charge for investment management. In this case, the invesment management portion would be netted out but the trustee's fees would be considered an administrative expense because they aren't related to asset growth.