Reimbursing Mistaken Fees of a Fund Company

[Gadgetfreak]

We were recently notified by a fund company who will remain nameless for now - scratch that, the fund company never contacted us, we started hearing from our clients - that they "mistakenly" charged too much for investment expenses for one of their funds. All of a sudden, my clients started reporting that checks were coming to them in the name of their Plans.

The fund company hasn't said what specific period these excess fees covered so we aren't really even sure which participants to reimburse. I will try to contact the fund company to find out but, before I do, I am wondering if any others were affected by this and how they are handling it. Unless the consensus is to simply give it to anyone who is currently in the fund (or stick it in the forfeiture account), this is going to be an enormous project. Who is paying for the time involved (if anyone)? Thanks in advance.

[jpod]

I haven't heard what you've heard. If necessary you may, by analogy, be able to rely on the DOL guidance that was issued in the early 2000s on what to do with mutual fund market-timing settlement checks.

[BG5150]

I think it's FAB 2006-01

https://www.dol.gov/ebsa/regs/fab_2006-1.html

[Peter Gulia]

BG5150, thank you for remembering this source.

"f a plan fiduciary determines that the cost to allocate the proceeds among participants whose accounts were invested in the mutual fund during the entirety of the relevant period approximates the amount of the proceeds, the fiduciary may properly decide to allocate the proceeds to current participants invested in the mutual fund based upon a reasonable, fair and objective allocation method."

RPG, if the recordkeeper quotes or estimates its fee for the extra allocation, would that information give a plan's administrator some grounds to support a cost-benefit decision about whether it makes sense to allocate a receipt according to some set of records about participants' accounts during past periods (or to use a rounder allocation)?

Or is even the effort of doing an estimate not cost-benefit-justified?

[Gadgetfreak]

I am the recordkeeper and can estimate that this will take a long time and wipe out nearly all of the check amounts coming to each of these 10 plans. I found FAB 2006-01 after jpod's post and I like it a lot. The problem is that it isn't exactly the same thing. I need some solid precedent so that, if I am questioned later on as to why I allocated in a certain way, I can rely on previous legal opinions.

Clearly, I can't deposit this in the forfeiture account. If I could easily say that it was OK to just divide the check across all current active participants or across all current active participants in the affected funds, then I would even waive most/all of my fees for doing the work (and all this research). But it isn't truly fair. If someone was invested in one of these funds 2 years ago and was hit with higher fees than they were supposed to, they won't see that money now.

Is the consensus here that I could rely on FAB 2006-01 as precedence and just go with one of the above two simple allocations?

[BG5150]

If the amounts are small (per participant), you can use them to pay expenses.

[Gadgetfreak]

The "per participant" phrasing is exactly the problem. All we know is that the funds took too much in internal expenses over a 2-year period. It is up to us, as the recordkeeper, to allocate to participants.

[Belgarath]

I would feel comfortable about accepting the Plan Administrator's instruction to use the FAB method.

[BG5150]

I, too, would feel comfortable using the FAB 2006-01 as a basis.

Also, if when the allocation method is decided upon, and if the amounts to the participants will be de minimus, you can use the amount to pay plan expenses.

The easiest was would probably be to just reallocate to everyone in the fund in the plan pro rata across account balances on a current basis.

Excerpt: (emphasis mine)

In addition, a fiduciary’s decision must satisfy the “solely in the interest of participants” standard of section 404(a)(1) of ERISA. In this regard, a method of allocation would not fail to be “solely in the interest of participants” merely because the selected method may be seen as disadvantaging some affected participants or groups of participants. In deciding on an allocation method, the plan fiduciary may properly weigh the competing interests of various participants or classes of plan participants (e.g., affected versus current participants) and the effects of the allocation method on those participants provided a rational basis exists for the selected method and such method is reasonable, fair and objective. For example, if a fiduciary determines that plan records are insufficient to reasonably determine the extent to which participants invested in mutual funds during the relevant period should be compensated, the fiduciary may properly decide to allocate the proceeds to current participants invested in the mutual fund based upon a reasonable, fair and objective allocation method. Similarly, if a plan fiduciary determines that the cost to allocate the proceeds among participants whose accounts were invested in the mutual fund during the entirety of the relevant period approximates the amount of the proceeds, the fiduciary may properly decide to allocate the proceeds to current participants invested in the mutual fund based upon a reasonable, fair and objective allocation method.