Payment of investment advisory fees out of plan assets

[k man]

Does anyone see a problem with paying invesment advisory fees out of plan assets in light of the recent DOL opinion on fees?

[Jon Chambers]

Not as long as they are reasonable. We have several clients that pay us from plan assets (of course, our fees are very reasonable).

[RCK]

If we're talking about Investment Management fees, I certainly agree that they are payable as long as they are reasonable.

If they are really Investment Advisor fees, and could be construed as for a plan design function, they sound like settlor expenses, and then not payable by the plan.

[k man]

I would say they are more closely akin to investment advisory fees as opposed to management fees. i am referring specifically to asset based fees charged by an Registered Investment Advisor to the plan for assisting the trustees in selecting and monitoring the investment choices in the plan.

[Jon Chambers]

My post was intended to address k man's example. We've worked with numerous ERISA attorneys that don't see a problem with charging our firm's fees for fund selection and monitoring to the plan (we are an RIA).

I do see RCK's point also. Some services we provide (such as vendor selection) are clearly supporting settlor functions, and these fees are paid by the sponsor. I guess a similar argument could be made for fund selection fees. However, our position is that following initial fund selection, selecting new funds is more of an ongoing plan operation and fiduciary monitoring function, so can be a permissible plan expense. At least one of our clients has been audited by the DOL, and they didn't raise an issue.

If we extrapolate RCK's argument a little, and apply it to commissions paid to a broker that renders advisory services, we might reach a different conclusion. A broker that conducts a vendor search that is paid with commissions from the plan is providing a settlor function that is paid with plan assets. Does anyone think that this is a problem?

Finally, we always discuss the pros and cons of paying fees from corporate or plan assets. Briefly, if paid from corporate assets, the company can deduct our fee as a normal business expense. If paid from plan assets, a tax-deferred vehicle (the trust) incurs the expense, hence lower future tax-deferred growth. Given these facts, most of our clients pay our fee from corporate assets.