TPA fees passed to TERM Paticipants

[PainPA]

A plan sponsor would like to charge the TPA per participant fee only to those terminated and will not take money out of the plan and cannot be forced becuase they are over $5k.

The document I use has a section for plan admnistrator elections and how fees are applied. If this is changed and the new SPD is sent out to the Term ee's. Am I running up against anything?

Thoughts? Concerns?

[John Feldt ERPA CPC QPA]

I think the new fee discosure rules will require that you disclose the fees in advance of such fees being charged to the partciipant's account. The current rules would say that you have the normal 210 days after the end of the plan year in which the change was put into effect, but since the new rules will affect the plan before that time, I think you should disclose these fees before the effective date of the new fee disclosure rules, at the latest.

[mbozek]

A plan sponsor would like to charge the TPA per participant fee only to those terminated and will not take money out of the plan and cannot be forced becuase they are over $5k.

The document I use has a section for plan admnistrator elections and how fees are applied. If this is changed and the new SPD is sent out to the Term ee's. Am I running up against anything?

Thoughts? Concerns?

This is the second OP on imposing fees on accounts of terminated participants in 2 hours. Under a DOL field bulletin a plan administrator can charge the costs of administering the plan only to former participants provided that the costs are a pro rata share of the costs of the plan. For example, if the adm costs are $10,000 and there are 600 active participants and 400 terminated participants the plan can charge each terminated participant $10. The admin charges should be in the SPD or a SMM.

Maybe I am cynical but its seems to me that imposing admin fees on terminated participants' accounts is the DC plan equivalent of airlines charging bag fee to raise revenue without increasing ticket cost. Maybe plans are imposing new fees to replace revenue from third parties that is being eliminated because the plan wants to show lower costs when the fee disclosure regs take effect later this year.

[John Feldt ERPA CPC QPA]

Could be.

For some employers, their bill from their service provider might include a "per participant" fee. If so, perhaps the employer is looking for a way to lower their own out of pocket cost attributed to those people who are no longer producing anything for their company anymore and perhaps this small fee will convince those folks to agree to a distribution. Hmmm - is that also a little cynical?

[mbozek]

Could be.

For some employers, their bill from their service provider might include a "per participant" fee. If so, perhaps the employer is looking for a way to lower their own out of pocket cost attributed to those people who are no longer producing anything for their company anymore and perhaps this small fee will convince those folks to agree to a distribution. Hmmm - is that also a little cynical?

I think that plan participants will see more "bag fees" to pay for costs of requesting plan documents, requesting more than one annual statement, costs of QDRO review, etc, similar to what some airlines charge for pillows or aisle seats. Maybe even fees to distribute benefits. The myth of disclosing plan expenses is that it will reduce participant costs while the reality is that plans will simply shift plan expenses to participants or reduce other benefits such as vacation or sick leave. There is no free lunch for reducing plan expenses except in the minds of the financial media.

[John Feldt ERPA CPC QPA]

Speaking from a relatively small plan experience (at the present time), we have seen a large increase in employer interest for charging reasonable plan fees to participant accounts, starting right at the end of 2008. None of them really even knew (or cared) much about the proposed fee disclosure rules in place at that time.

Many employers looked at every possible cost they had, including their plan fees. These plan fees were part of this consideration for our clients since we don't provide "free" plan administration unlike many bundled providers claim to do (but they do disclose their fees, for example, in various places on pages 27 through 48 of a contract written in 8 point font, or smaller). With declining revenues, employers had to make changes, and quickly (you know banks don't loan money because you need cash to cover payroll - you have to show the bank a plan to make a profit so they can be paid back). Some were looking for any possible way to keep the business running (some failed to be able to do that).

Not that plan costs are a big chunk of an employer's business costs, but for these smaller plans, it was not insignificant. Because of that, we saw a large number of plans begin to shift some costs to employees (quite a few did this at the same time the plan was restated for EGTRRA with the a SPD being done).

I don't think it's a majority of plans, but a much larger percentage now are doing this than before the end of 2008.

Perhaps it's the bigger plans that are shifting now that your seeing? Even if they are, the service provider agreement will still need to disclose all the fees being paid from plan assets, so I don't see just that requirement would be significant enough to make an employer change their approach for how the plan gets paid for.

These comments are probably not worth $0.02, but that's what I'm throwing in.

[PainPA]

These are great comments and good to hear what else everyone is experincing.

Not sure what other TPA's with all the terms in a plan but we work with the plan sponsors to remove anyone that can be (forced) and act dilligently with those over $5k. What I mean by that is that we just do not provide an admin binder with the forms for the plan sponsor to use. That process might work better with a larger 100+ ee plan where they might have a HR person working on it. But it just doesn't work for the dmaller plan market.

However, all the plans I have been transferring/capturing over the last 2 years have so many term participants that need to be cleaned up. Just isn't right. The last one I picked up has so many terms that I basically sold the plan by saying if we get rid of all these it will drop you below the large plan audit requirement. That is all they needed to hear.

Thanks for everyone's cmments.

[K2retire]

The last one I picked up has so many terms that I basically sold the plan by saying if we get rid of all these it will drop you below the large plan audit requirement. That is all they needed to hear.

It amazes me how often something that simple is overlooked as a cost cutting measure!

[PainPA]

penny for your thoughts...

If the plan document has langauge for the rollover program (uner $1k cash or $1k-$5k roll), are there any concerns for a plan sponsor not adhering to the plan document and getting these out fo the plan?

[John Feldt ERPA CPC QPA]

Yes, it would be an operational error, failure to follow the terms of the plan.

[austin3515]

Out of curiosity, does anyone have a litmus test for determining whether or not a fee is reasonable? So for example, if the per capita fee for administration comes out to $250 a head (plan has a CPA audit), is that reasonable? Many people have accounts between $5,000 and $6,000 so this works out to be a hefty percentage of their accounts (north of 5%).

In this situation, the sponsor WOULD send out a letter to the participant indicating that this fee is going to be assessed beginning on, say, April 1, and anyone who closes their account before this date will not be assessed the fee.

My other concern is that this could be considered coercive.

The client REALLY wants to get the counts down, which is why we are having this discussion.

The crux of my question really is whether or not there is an quantitative guidance regarding whether or not the AMOUNT of the per capita fee is reasonable.

[ESOP Guy]

Austin:

Nothing official but ….

I worked on a plan like you describe back a few years ago. The per capita expenses were such that all but the biggest balances lost money every year. The small balances even in a good year for the stock market would not grow the account more than fees. We kept telling them that fact would raise alarms with the DOL etc.

We convinced them to simply terminate the plan.

We had offered to look into helping them set up a Simple or some such plan that I know next to nothing about those types of plans.

But to me that company is not doing there people any favors with the fees that high. My guess is they can set up a plan that would allow their people to keep more of their money.

[austin3515]

Terminating wouldn;t work, and they ahve more than 100 ee's so no SIMPLE's...

[mbozek]

Out of curiosity, does anyone have a litmus test for determining whether or not a fee is reasonable? So for example, if the per capita fee for administration comes out to $250 a head (plan has a CPA audit), is that reasonable? Many people have accounts between $5,000 and $6,000 so this works out to be a hefty percentage of their accounts (north of 5%).

In this situation, the sponsor WOULD send out a letter to the participant indicating that this fee is going to be assessed beginning on, say, April 1, and anyone who closes their account before this date will not be assessed the fee.

My other concern is that this could be considered coercive.

The client REALLY wants to get the counts down, which is why we are having this discussion.

The crux of my question really is whether or not there is an quantitative guidance regarding whether or not the AMOUNT of the per capita fee is reasonable.

Austin:

Isnt the purpose of the ERISA 408(b)(2) regs to make the fiducaries look at all fees being paid to determine whether they are reasonable for the services provided by comparing them to benchmarks. If the fees are not reasonable then the plan has to find lower cost providers. I dont know if a CPA audit is considered an admin expense or is a settlor expense. Most plan admin fees I have seen are in the range of $20-36 per participant and some are under $20. I have never been able to figure out why some TPAs charge $50 while other advertise admin fees of half that amount anymore than why some lawyers charge $500 per hour and others $200.

What is the benchmark for CPA audits? Years ago clients were quoted 8-10k minimum. What is the cost today?

I think the DOL regs are going to result in a reduction in the cost of all services being provided to plans the way the SEC's elimination of fixed fees for stock trades in 1975 resulted in the reduction of commissions and the rise of discount brokers who charge $10 to execute a trade of 10,000 shares. Another race to the bottom.

Plan fids should reduce unnecessary costs such as audits by reducing the number of participants below 100 by paying out benefits below $5000. I dont see how notifying a participant that fee will be imposed if the account balance is not removed would be coercive when a DOL FAB expressly permits a plan to charge only terminated participants the pro rata share of the plan admin fees.

Plans could also eliminate the accounts of missing participants who cannot be located by using the forfeiture rule permitted under the IRS regs subject to reinstating the account balance if the participant returns to claim it.

[austin3515]

Assume for the sake of argument that the CPA's fees are dirt cheap, and very very reasonable. And we've done everything we possibly can to get the counts down to avoid the audit - mind you, this whole project is part of the plan to get out of an audit.

Does the mere fact that the per capita fee is extremely high make it unreasonable? That is the question.

[mbozek]

Terminating wouldn;t work, and they ahve more than 100 ee's so no SIMPLE's...

How about a SEP?

[austin3515]

No offense, but really??

[mbozek]

Assume for the sake of argument that the CPA's fees are dirt cheap, and very very reasonable. And we've done everything we possibly can to get the counts down to avoid the audit - mind you, this whole project is part of the plan to get out of an audit.

Does the mere fact that the per capita fee is extremely high make it unreasonable? That is the question.

Austin:

You are missing the point. A fee is unreasonable when is compared to a much lower fee for comparable services. If the per participant fee is $250 b/c the plan must conduct a DOL audit then the plan would need to get RFPs from other CPA firms to confirm that the fees are reasonable. How else is the plan going to know if their current costs are reasonable other than by comparison shopping just as consumers do on line? If the RFPs confirm that the fees are reasonable then the plan has conducted the necessary due dilligence which would demonstrate to the DOL that the fees are reasonable if the plan is audited. The by product all of these new regulatory initatives to reduce plan costs is that plans will incur additional costs to confirm that the costs for plan admin are reasonable. We all know who will pay for that. There are rumors going around that plan providers will now include an additional fee for the cost of preparing the disclosure of plan fees.

[Bill Presson]

Terminating wouldn;t work, and they ahve more than 100 ee's so no SIMPLE's...

How about a SEP?

Of course. That resolves all the issues and they're always free.

[austin3515]

I'm familiar with the concept of overpaying for something.

I'm not going to bother asking the same question a different way, because I just can't imagine making the question any more straightforward. I had requested that the assumption be made that the CPA's fees are reasonable.

Or are you suggesting that the per capita fee can be anything as long as on a plan level the fee is reasonable? How about $500 a person (TPA fee = $1,500 and there are three participants)?? The fee is reasonable, but is it reasonable to do this? The point is at what point is it unreasonable solely because the per capita number is so high?

I said I wouldn't reask the same question, but I guess I done did it anyway.

[mbozek]

I'm familiar with the concept of overpaying for something.

I'm not going to bother asking the same question a different way, because I just can't imagine making the question any more straightforward. I had requested that the assumption be made that the CPA's fees are reasonable.

Or are you suggesting that the per capita fee can be anything as long as on a plan level the fee is reasonable? How about $500 a person (TPA fee = $1,500 and there are three participants)?? The fee is reasonable, but is it reasonable to do this? The point is at what point is it unreasonable solely because the per capita number is so high?

I said I wouldn't reask the same question, but I guess I done did it anyway.

If requested how would you demonstrate that whatever fee you charge a client for a particular service is reasonable? Or are you going to tell the client it is reasonable because you assume it is?

Do you know what your competitors charge?

You seem to have a problem with understanding that reasonableness of fees is relative to what others charge with the caveat that a higher fee is reasonable if it provides more benefit to the client, e.g., additional services.

[austin3515]

Not one of your responses has addressed the question I have posed.

[Kevin C]

There are really two questions here. First, is the overall fee level reasonable for the services provided? Second, is the fee allocation method reasonable?

FAB 2003-3 addresses fee allocation methods. How the fee is determined can affect whether the allocation method is reasonable. Basically, it comes down to being a judgment call by a fiduciary. It says the method of allocation must have a reasonable relationship to the services furnished or available to an account. It also notes that if the fiduciary making the decision is also a participant, there may be PT issues if the benefit to the fiduciary is more than incidental. Since the fiduciaries are usually HCE's with large balances, I think your example of a $500 per capita allocation has a problem with both cautions if there are participants with small balances.

Most of our clients allocate fees pro-rata based on balances. A few allocate the per participant portion of our fee to each participant and the rest of the fees pro-rata. We also have an RIA branch where the fee is based on assets, which must be allocated pro-rata to be a reasonable allocation.

As for an overall level, we advise that the admin fee allocation should be kept under 1% annually, even if that means the employer needs to pay some of the fees. For brand new plans, we tell them the assets need to accumulate to a certain level before they can have the plan pay admin fees.

[austin3515]

Kevin C,

Thank you thank you thank you.

[GMK]

In any case, it's still up to the plan sponsor/administrator to justify that fees being charged are reasonable for the plan.

So, we get to do the RFP thing, which is not fun, but is informative. I also think the fee disclosures will be a wake up call to plans that have not paid close attention to fees, with good results for participants in most cases.