Employer paying all plan expenses?

[gdlfa]

I have a client who, instead of doing a profit sharing or matching contribution for employees, prefers to just pay all plan expenses for them. They want to include mutual fund expense ratios in these plan expenses. My question is, would this be at all possible? Assuming expenses are paid daily out of returns from the mutual funds, is there a way to do a calculation of exact expenses paid at the end of the year, and if so, can the employer legally reimburse these funds into the employee accounts?

Thanks in advance for your help!

[ETA Consulting LLC]

Mutual fund expenses appear to be part of the calculation of investment return. So, when you're selecting a mutual fund as an investment, the expense ratios for that fund would impact the return you'd expect to receive. I cannot see how an Employer could expect to fund these for each participant and have those amounts not to be considered as "Contributions".

If I owned a business and had a plan with $2million in my personal account and my employees had a combined $50K, then it would behoove me to create a formula where (as the Employer) I could reimburse the mutual fund expenses to each participant's account and not have them treated as contributions. To heck with Safe Harbor, I'd sell this plan design all day everyday. But, it's never going to happen.

Good Luck!

[RatherBeGolfing]

I had a situation that was a little different, but it may be helpful.

I have a client, a fairly large medical practice with 10+ physicians and about 70 employees. The practice does very well. During a yearly meeting, the physicians asked whether they could pay all investment expenses out employer assets rather than from the investments. They never pulled the trigger on it but we verified that it could be done.

We looked into it with the adviser and the record keeper and indeed, there was a way for the employer to get quarterly invoices for the amounts that would have been fees per the expense ratio. The fee would never be deducted from plan assets, and the employer gets to write them off as a corporate expense.

I agree with ETA though, I don't think you can do it by reimbursing fees already paid by a participant and not consider it a contribution.

[MoJo]

RatherBeGolfing: Were those mutual funds or separately managed accounts? I did some research a while back (way back) and under SEC rules a mutual fund cannot not take fees out from the assets held by one investor invested in a share class when it takes fees out from the accounts of the other investors in the same share class (i.e. all investors in a regulated investment company ("mutual fund") MUST pay the same freight (within the same share class). So, the only way that would work would be if there were either in a no-expense share class (not likely) or if they reimbursed the plan after the fact (and I recall an ancient Rev Rul (1980 or so) that indicated that inherent expenses involved in managing assets could not be reimbursed and any such attempt would be considered a contribution to the plan (and too the extent it disproportionately benefited you know who, you had a discrimination problem).

Now, if it were a separately managed account (not a mutual fund) and the deal you struck with the money manager allowed for the payment of fees not from the assets, you might be able to do it....

If I can find the research or the Rev Rul, I'll try to post it.

[RatherBeGolfing]

Hey MoJo,

This would have been mutual funds. As I recall, the were told that they could do it, but since they never actually went through with it it is possible that it would have been nixed at a higher level.

J

[Bird]

I think the practical way to do this is to use a share class that carves out all but the basic management expenses, and then bill all other expenses directly. I'm pretty familiar with the American Funds, so I'll use Income Fund of America as an example. R-4 share expenses look like this:

Management fees 0.22%

12b-1 fees 0.25%

Other expenses 0.15

Total 0.62

If you use the R-6 share class, the 12b-1 fees go away, and Other drops to .06, so the total is 0.28%.

The advisor (has to be an RIA not just commissioned) can still get 0.25%, and since "Other" includes some sub-TPA fees and recordkeeping costs, those can also be billed separately.

This works in RecordKeeper Direct and PlanPremier TPA.

Remarkable how low the actual "Management" part of the overall fees is.

[K2retire]

I have a client who, instead of doing a profit sharing or matching contribution for employees, prefers to just pay all plan expenses for them.

I guess my age is showing. To me the concept of charging the participant for plan expenses is the "new and different" way of doing things. I miss the days when employers expected to pay those expenses!