Fees being treated as a "forfeiture"

[Belgarath]

Looking at a plan, and it doesn't seem right to me.

The plan charges a fee to terminated participants who leave funds in the plan. $100 per ppt per year. The recordkeeper also pays revenue sharing to the TPA.

The Revenue sharing now equals or exceeds the TPA fees, and the $100 per ppt per year charge is being put in a "forfeiture" account, and the client is being told to offset required match contribution by the balance in the forfeiture.

As Archie Bunker once said, "I smell something stinko in the city of Denmark." This fee doesn't seem to qualify as a "forfeiture" as that term is defined.

So, what can be done with these amounts? Maybe I'm being unnecessarily conservative in my viewpoint. What do other folks do?

[Bill Presson]

Time for the fiduciaries to negotiate a reduction in the revenue sharing.

[Paul I]

The biggest concern is the use of the expense charge as a forfeiture against the match.  That needs to stop ASAP and the plan should consider making a match contribution equal to the sum of any prior offsets. 

Aside from the TPA fee, does the plan have administrative expenses for other service providers that can be charged to the plan?  If yes, and they exceed the revenue sharing amount, this could help clean up the issue.

If the revenue sharing is so large that it covers all expenses, then consider allocating the excess to participants as a credit.  This could be done on account balance or per capita, and would include the accounts of the terminated participants.

Personally, I agree with Bill that a simple approach is to negotiate a reduction in revenue sharing.  It will be less work to administer the plan and less likely to attract a suit for having overpriced investments.

[Belgarath]

 

5 minutes ago, Paul I said:

The biggest concern is the use of the expense charge as a forfeiture against the match.  That needs to stop ASAP and the plan should consider making a match contribution equal to the sum of any prior offsets. 

Aside from the TPA fee, does the plan have administrative expenses for other service providers that can be charged to the plan?  If yes, and they exceed the revenue sharing amount, this could help clean up the issue.

If the revenue sharing is so large that it covers all expenses, then consider allocating the excess to participants as a credit.  This could be done on account balance or per capita, and would include the accounts of the terminated participants.

Personally, I agree with Bill that a simple approach is to negotiate a reduction in revenue sharing.  It will be less work to administer the plan and less likely to attract a suit for having overpriced investments.

Agreed - and thank you both. No other admin expenses, apparently. Allocating as a credit seems like the most viable solution to me. And then either a renegotiation of revenue sharing, or the plan should be amended to ditch the term'd participant fee, or a combination of both.

[Roycal]

I would question the $100 charge in the first place.  As I understand it, this is a charge that current employees would not pay.  Looking at this solely from a legal standpoint, I don't see any reason to charge participants who are now former employees more than current employee-participants.  [Note, however, I'm not a lawyer and am not attempting to give "legal advice" here.]  I'd argue that this is a penalty for leaving your account in the plan (I assume here that the former employee participants could have cashed out), and could be a plan qualification problem.  I speak from experience on a different but related issue with the IRS.  I'm not up-to-date on regs and rulings, but this is something I'd suggest the plan sponsor check out carefully, and if not clearly covered by current rulings or regs, get a ruling of some sort.  All that having been said, the question of how plan participants bear or pay plan expenses, how they are allocated, or should be, is complex, messy, and I'll leave it at that.

[Paul I]

Roycal, please see

https://www.napa-net.org/news-info/daily-news/can-plan-charge-fees-terminated-participants-not-active-ones