Fixed Fee Deductions - can it be discriminatory?

401(k) Plan has no HCE or Key participants.

Plan allocates TPA fees among all participants in equal amounts.

So those with large accounts will have less than 1% taken out, but a new participant will have 20% taken out.

This doesn't feel right but I am looking for an argument to give the plan sponsor and wasn't sure if there was some kind of discrimination issue.

The one who makes this decision is getting less than 1%.

Maybe it's simply that that is not 'reasonable'.

In internal guidance to government employees, here’s what the Employee Benefits Security Administration in 2003 said:

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2003-03

The bulletin includes this: “A per capita method of allocating expenses among individual accounts ([that is], expenses charged equally to each account, without regard to assets in the individual account) may also provide a reasonable method of allocating certain fixed administrative expenses of the plan, such as recordkeeping, legal, auditing, annual reporting, claims processing[,] and similar administrative expenses.”

I express no view about that or any other interpretation in the bulletin.

I can't think of any time that we've done that, and probably the reason is we've never even considered offering it.  Our (TPA) fees are almost always paid directly by the employer, so it doesn't come up, but when we have large fixed base fees for recordkeeping, I've always said you "have" to allocate them pro-rata.  

Allocation of fees is a fiduciary responsibility. How would your fiduciary decision maker feel arguing he or she allocated 20% of a participant's account balance to fees? If it were me, I would not want to make that argument to any governing body. I've seen a client do it, though, and he was HCE/key!

Bird - I can assure you this was not set up by my firm.  It's a new account and apparently that's how they've 'always done it'.  Well not anymore.  Too much risk exposure. 

Unauthorized commentary:  When I find questionable procedures, it's almost always from larger practices that are focused more on sales than on service and the employees who provide the service. The other odd practice is how many of these practices don't even have a checking system.  If a Sr. Consultant had seen this in action maybe it would have been stopped already.  But then if they figure this out, their unintended role as my nonpaid sales team might crumble.

I just reviewed a proposal today from a recordkeeper I had not previously encountered but that seems to have a well-thought-out fee structure that does per capita. $120 per participant annually. It's a small plan for a relatively new law firm. $120 per head will come out to a little less than 18 basis points if it were pro rata.  It seems fair to me for all but the smallest accounts, e.g. for a $10,000 account it's about 1%, which is high but not terrible. And if the employer matches decently, seems fair. I mean, why should, e.g., a clerical employee who's been with the firm for 10 years and has $100k in their account subsidize a young lawyer who is just starting out and has a small account? Obviously, that's a cherry-picked example, but it would be one possible case. Agree that it is more likely the partners would end up subsidizing everyone else, to differing degrees, but it would make more sense if that's the case for the partnership to just pay the fee itself rather than subsidizing it through the plan. I agree this can be looked at in different ways, but it seems to me that the DOL's guidance is correct, i.e., that it is a potentially fair way to allocate fees. It also is less likely to lull an employer into "fee creep" as the asset base gets larger over time. The fundamental question is whether a recordkeeper's costs are driven more by number of participants or asset size, and it seems to me they're more likely driven by number of participants. I guess the employer could also contribute, discretionarily, an additional $120, in this example, to each non-highly compensated employee's account, or to all NHCE accounts < some number, e.g. $10,000.

Of course, if recordkeeping fees are calculated on a per-participant basis, but paid from shared mutual fund servicing fees, then they are borne by the participants proportionally to assets, not really per capita.

Beyond points mentioned above, an allocation of plan-administration might not be a binary choice between an equal amount for each individual and amounts in proportion to individual accounts’ balances. For example:

One might allocate expenses half by heads and half by balances. A client considered this because many bigger-balance participants, almost all 59½ and older, were exiting the employer’s plan to direct rollovers into (for them) less expensive IRAs.

Or put a constraint on a lower-balance portion of the range. For example, divide an expense into equal amounts for those accounts charged, but don’t charge an account if its balance is less than $n,nnn.

Or constrain what’s charged to a bigger-balance participant. For example, charge individuals’ accounts in proportion to balances, but no charge exceeds $nnn.

BenefitsLink mavens who know much more math than I know could imagine more ways.

I do not advocate any particular allocation. Rather, I mention only that choices might be wider than the two described in EBSA’s bulletin.

Of course, a plan’s fiduciary must consider whether an allocation would be within the recordkeeper’s, third-party administrator’s, or other service provider’s contracted or available service.

And even if that’s not a constraint, sometimes KISS—keep it simple, striver—might be prudent.

Peter - those are great idea, though certainly making things more complicated.

So...I pointed out the risk exposure, a variety of options, and the Plan Administrator only wants to do what is always done. I'm sad about that.  My guess is she was so trained by prior TPA's.  I feel like I put some pretty strong arguments out there. I just don't think it's right to assess a new participant 20% when the decision maker is only being assessed 0.1%.

The decision maker is neither HCE nor Key, yet has a plan balance?

4 hours ago, Bri said:

The decision maker is neither HCE nor Key, yet has a plan balance?

Yes, the owners/officers do not participate, but this is the person that runs the business and has been there 20+ years.

We/ I always advise against this.  It is a sure-fire way to discourage participation by the people a 401(k) needs most when trying to pass ADP and ACP (if applicable) tests.  Who would voluntarily participate in a plan where 20% went for fees?

PNJ