ESOP Administration Fees

[Guest EddieESOP]

Is there a limit (% of assets) that a plan sponsor can pass through to ESOP participants for administrative fees? It appears that our plan was charged 5% of plan assets!!

Any help would be appreciated.

Thanks

[BeckyMiller]

Are you looking at your participant statement that includes a line item for expenses? Do you have more than one entry for expenses?

If your employer sponsors a "leveraged ESOP" that means that the plan incurred debt to buy a block of stock. The plan incurs interest expense on that debt and that interest expense is paid with employer contributions or dividends. On most participant statements, you will see additions for the contribution and the dividend, if any. You will also see a deduction for the interest expense.

So - that may be the expense that you are seeing and it could be quite large.

If your statement specifically says that it is an administration expense, having a leveraged ESOP may still result in these large expense costs in the early years. The plan may have $10 million of assets and $9.5 million of debt, so that all the participants see on their statements is the $500,000 that has been allocated to their accounts. (Note, this is a gross simplification of how ESOPs work.) The plan may have expenses for the annual accounting and reporting, a plan audit, the stock valuation, etc. It would not be unusual to see $25,000 for these expenses or even more. Thus, the expenses are only .25 percent of total plan assets, but 5 percent of what you see in your account.

To help you understand this, realize that the law allows you access to the financial reporting for the entire plan. Start with your human resources person and ask for a copy of the Form 5500 for the plan.

[Guest EddieESOP]

Becky,

Here are a few more facts:

1. Plan Sponsor is in Liquidation

2. All participants are 100% vested

3. Exempt loan was paid in full

4.Expenses were not deducted on ESOP Statements. It is anticipated the administrative expense will be deducted from interest income

5. Administrator has quoted $350 per participant or approx. 5% of the plan assets to process distributions from “A to Z”

Question:

How is the administration fee allocated to participant accounts? $350 / particiapant or allocate the total fee $39,000 based on participant cash balances. The former would clearly allocate a greater share of the expense to participants with higher cash balances.

[Guest PAUL DUGAN]

The expense charges more than likley include expenses many ofwhich are plan related such as preparing 5500 forms and filling with the IRS for approval of plan termination and maybe plan rewrite for GUST. I believe that administration charges should be charged to participant accounts based on assets. However most plan documents only state that the Plan may pay resonable expenses with out any method of allocating those expenses. In the majority vast majority of 401(k) plans all expenses are deducted from earnings (or this year added to losses). These plams are ussually sold as "free no expenses charged"

If expenses are charged by participant how do you deal with the participant that has a $300 account balance I ma sure the administrater is'nt going to reduce his fee by $50.

Is 5% reasonable? That depends on a 100 life plan with $700,000 of assets - yes. on 1,500 life plan with $10,500,000 of assets - no.

One question if the corp is in liquidation what is the stock really worth.

[BeckyMiller]

In my experience, where the plan pays such expenses, they are typically considered to be a plan expense, not a participant expense. Thus, they would typically be allocated as a percentage of plan assets. Participants with large balances would bear a greater share of the costs, than participants with smaller balances. Frequently, the plan's language will merely discuss an allocation of the net income or loss of the trust, which would be investment earnings reduced by these kind of expenses.

But, such allocation is controlled by the terms of the plan. As a participant in the plan, you would also have the right to review the plan agreement. There would generally be an allocation section. There may also be a definition section that defines net income or loss for purposes of the plan.

Unfortunately for a plan with relatively few participants (which means less than 200), the costs of terminating a plan can be very substantial on a per participant basis for the reasons noted Mr. Dugan.

[Kirk Maldonado]

Could part of the expenses charged to the plan include the fees paid to the appraiser that did the annual valuation of the company stock? That could account for a significant portion of the plan administrative fees.