Engagement agreement language

[Belgarath]

I was just looking at an engagement agreement, and I saw something that I don't recall seeing (or perhaps never noticed, because I don't necessarily review a prior TPA's engagement agreement) before. It states that the TPA will bill the Plan Sponsor for services, then goes on to state that the TPA may deduct the service fees for the services directly from the participants' accounts upon non-payment of fees by the plan sponsor after 60 days.

Is there any problem with this from a legal standpoint? It feels funny, but maybe it is fine as long as the plan sponsor/fiduciary has authorized it. Is this a common provision? 

[Peter Gulia]

Many agreements include provisions for the retirement plan to pay the service provider’s fee—some in the first instance, and many after another anticipated payer did not pay after some specified period.

 

(In my experience, a provision of this kind is common with recordkeepers.  I suspect it is less common with TPAs.  For investment managers and investment advisers, paying a fee from the assets managed or advised is common.)

 

Some design factors include these:

 

Make the retirement plan a party to the service agreement, or at least an intended third-person beneficiary of the service agreement.

 

Make distinct a fee for a service that is a settlor (rather than plan-administration) expense.  Collect from the plan only a proper plan-administration expense.

 

Don’t collect a fee from the plan if the service recipient or the responsible plan fiduciary disputes whether the fee is owing.

 

Design the timeline and method for collecting a fee so the service provider lacks discretion.  Even if the service provider does not fear being a fiduciary, it should avoid self-dealing regarding its own compensation.

 

In the agreement, specify the method for allocating the expense among participants’, beneficiaries’, and alternate payees’ accounts so the plan’s administrator will have instructed the service providers on the allocation.

 

Recognize that collecting a fee might require a trustee’s, custodian’s, or insurer’s cooperation.  Specify the administrator’s grant of the service provider’s power to collect its fee with enough clarity that the asset holder will accept the service’s provider’s instruction as binding the administrator and protecting the asset holder.

[Belgarath]

Thank you Peter.

[G8Rs]

Peter

Could that last item you raised - the power to collect the fee - result in the TPA becoming a 3(21) fiduciary?

[Peter Gulia]

A fee-collection power might make one a plan’s fiduciary.

 

A service provider might argue it lacks discretion because an independent fiduciary approved the service agreement’s terms, including the fee and the power to collect it from the plan.

 

Further, a service provider might argue it lacks even non-discretionary “authority or control respecting management or disposition of [the plan’s] assets” because the bank, trust company, or insurance company decides whether to pay a requested amount from trust or quasi-trust assets.  (A weakness is that the service provider might carry the administrator’s power to direct a payment.)

 

A fee-collection power might involve an agency, which the common law treats as a fiduciary relationship.

 

One can imagine a court deciding whether a service provider was a fiduciary using different reasoning or analysis, or applying a different finding of the facts.

 

Remember, treatment as an ERISA-governed plan’s fiduciary is “to the extent” of what makes one a fiduciary.

 

Some service providers, even if the services are non-fiduciary, don’t fear treatment as a fiduciary.

[RatherBeGolfing]

23 hours ago, Belgarath said:

then goes on to state that the TPA may deduct the service fees for the services directly from the participants' accounts upon non-payment of fees by the plan sponsor after 60 days

I have seen this language in TPA contracts before (with some variations on the exact language).  A more common wording would be something like "shall be paid by the plan to the extent it is not paid by the employer."   I agree with Peter's comments above, there are MANY considerations from as contract drafting standpoint that become crucial.  "May deduct" probably does not mean that the TPA can just take it from the plan, it just creates a contractual obligation.  

I think the cases where the TPA has the power to direct an unrelated RK to make a payment are very rare.

To me, the more troubling part is who makes the determination that the expenses are reasonable and necessary?  That is a fiduciary act, so if the TPA truly has the authority to collect payment unilaterally, I don't see any way it is NOT a fiduciary.

Also, keep in mind that these things sometimes come down a poorly drafted service agreement.  I have seen some that are clearly copy/paste jobs by people who do not understand the language, or even worse, attorneys who don't understand the players involved (and their functions/duties) and simply use "A shall be paid from C in the event of non payment from B".