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Charging Advisor Fees to Accounts


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Has anyone seen an ERISA 404(c) plan that allows participants to have their own investment advisor's fees paid out of their plan account?  I have seen this, but only in the case of self-directed brokerage windows within a plan.  I have a client asking if they can allow participants to obtain advice on allocating their accounts between the plan's designated investment alternatives and charge the associated advisory fee against their account.  This strikes me as technically permissible, but a huge pain to administer.

I've located a couple of similar message board threads which reached a similar conclusions, but they predate the service provider and participant level fee disclosure regs, which seem like they would raise some additional roadblocks.

Any thoughts appreciated.

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I would say no.  It is not a plan expense.

Plus, the expense is beyond the plan administrator's control, and therefore the PA cannot determine if the fee is reasonable.

And the PA cannot control where that advice comes from.  Could I ask my broker for advice?  My brother's wife who works in finance at her company?  My buddy, who's broker is EF Hutton, and EF Hutton says...

(Only those of a certain age will get that last reference)

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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On 9/22/2021 at 1:53 PM, BG5150 said:

I would say no.  It is not a plan expense.

Plus, the expense is beyond the plan administrator's control, and therefore the PA cannot determine if the fee is reasonable.

And the PA cannot control where that advice comes from.  Could I ask my broker for advice?  My brother's wife who works in finance at her company?  My buddy, who's broker is EF Hutton, and EF Hutton says...

(Only those of a certain age will get that last reference)

I think it's a legitimate plan expense, if the advice relates solely to the investments of the account, and allocable to the participant's account, but I agree with the rest of your points, BG5150.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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For an ERISA-governed individual-account retirement plan that provides participant-directed investment, such a plan’s fiduciary could allow directing participants to select, individually, one’s investment adviser, and to direct payment of a reasonable investment-advisory fee with a charge against the directing participant’s individual account.

A fiduciary allowing such an arrangement might (i) restrict it to registered investment advisers; (ii) restrict it to advisers that commit to the allowing fiduciary’s terms, including assurances about delivering initial and updated ERISA § 408(b)(2) disclosures to the allowing fiduciary; (iii) require a directing participant to certify that she received all disclosures required under investment-adviser law and ERISA § 408(b)(2); (iv) set a maximum on the investment adviser’s fee a participant may direct, and (v) require that the fee be charged in a format and on an interval the fiduciary finds efficient for the plan’s administration with the recordkeeper’s services.

I’m unaware of an ERISA Advisory Opinion that speaks to the question BTG asked.  But there are tax-law rulings that support paying an investment adviser engaged by an individual, rather than by an employer plan’s fiduciary.

In Letter Ruling 93-16-042 (January 27, 1993), the IRS assured a participant that quarter-yearly payments of her investment adviser’s fee would not tax-disqualify her § 403(b) contract, would not be distributions, and thus would have no tax consequences.  The IRS treated the investment adviser’s fee as analogous to a trustee’s fee incurred by a § 401(a) plan.

Under the investment-advisory agreement and § 403(b) contract presented in the ruling request, each individual participant would engage the investment adviser, and instruct her § 403(b) contract issuer to pay the investment adviser’s fee and count those payments as charges against the § 403(b) contract’s account balance.  (For a § 403(b) arrangement, an annuity contract or custodial account fills the function of what otherwise would be a retirement plan’s trust.)

The IRS’s analysis did not depend on any express or implied approval by a plan’s fiduciary.  There could not have been such a condition because the ruling requestor’s § 403(b) contract was not (and never had been) held under any employer’s plan.  Further, the ruling specifies the participant, the investment adviser, and the § 403(b) contract issuer as the parties to the arrangement.  The ruling mentions no fiduciary other than the participant’s investment adviser.

The IRS’s reasoning, which the ruling itself describes as a “well established” general principle, applies widely for all kinds of eligible retirement plans and without regard to the investments held under the plan.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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An earlier discussion on this topic, that does address the fee disclosure question:

 

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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C.B. Zeller, thank you for your help in the earlier conversation, and for reminding us about it.

(BTG, my posts in the earlier conversation and above, taken together, explain how 408b-2 and 404a-5 disclosure rules need not be an impediment.)

It seems many big recordkeepers lack a business interest in facilitating payments to unaffiliated investment advisers, until enough plan sponsors demand that service and have the bargaining power to motivate the recordkeeper to build it. 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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