Charging Fees to Terminated Participant Accounts

[khn]

We are working with a client who wants to begin charging an annual $50 administrative fee to terminated participant accounts.

Their recordkeeper is trying to figure how they're going to handle this. Once they deduct the fees, where should they go? I don't think they could be added to the Erisa Budget account, as this should probably only hold funds from excess revenue. Any thoughts?

[Guest A_Dude]

Is this to attempt to offset cost, or oppine terminated people to take thier monies out? If the latter, I would be hesitant.

[khn]

They would like to do it as a way to offset costs. The original thought was they would add it to their Erisa Budget but that doesn't seem kosher to me.

[Kevin C]

Are the service providers currently charging $50/yr. per participant? You are asking where this fee should go, so I doubt it is something currently being charged. FAB 2003-3 addresses charging terminated participant their share of the fees while the employer pays the fees for actives. I may be reading your post wrong, but I take it as they want to start charging an extra $50 to each terminated participant and use it to offset plan fees for everyone else. If the terminated participants will be paying more than their share of the fees, I think you have a problem. If the fiduciary making the decision to do this benefits from it, the FAB points out there could be issues with self-dealing.

[BG5150]

I agree with Kevin. If the terminated participants will be charged an EXTRA $50, I doubt that will sit well with the agencies. If the company is already paying $50 a participant and they want the termed people to pay instead, I believe that's ok. I already do that with some of my clients.

[khn]

They are currently paying the recordkeeper 15bps for all recordkeeping fees, which is paid from the erisa budget, but no separate $50 per participant fee. They want this $50 per participant fee to be used to go into their erisa budget and help pay the 15 bps.

[My 2 cents]

May be a fair exchange if the accounts are up over $30,000 but excessive if they are not. Why not charge the 15bps?

[BG5150]

Good point, Two Pennies.

[Kevin C]

By ERISA budget, I assume you are referring to revenue sharing. If all recordkeeping fees are currently being paid by revenue sharing, I think you will have a problem if a $50 fee is allocated to terminated participants. For one thing, they would be paying their share of fees through revenue sharing plus an additional $50 of other peoples' fees. Second, the $50 amount has no relation to the actual fees, so I don't see how the fee allocation method could be considered reasonable. I also wonder if an additional $50 annual fee for terminated participants would be considered a significant detriment under 1.411(a)-11(c )(2) imposed on participants who do not consent to a distribution.

A better approach is to make an arrangement with the recordkeeper where some or all of the fees for the active participants will be billed to and paid by the employer, while the fees for the terminated ones will continue to be paid by revenue sharing. That is IF the recordkeeper is willing to change the way they bill. We have a few clients that pay fees for the actives, but not for the terms. The same fee structure still applies, the only difference is who pays the fees.