Plan investment fees charged only to the accounts of terminated participants

So, 401(k) plan with a recordkeeper (XYZ) charges a fund fee/Advisory fee/charge/whatever you want to call it - of (x basis points - already determined by the Plan Fiduciary to be "reasonable"). This fee is billed to the EMPLOYER, who pays it, so that participants' accounts are not charged this fee.

Employer now wants this fee to be charged directly to the accounts of terminated participants only.

Assuming this fee is "reasonable" - and some procedure can be worked out between the recordkeeper and the Employer as to the mechanics of how it is processed - I'm not sure it is necessarily a problem, but it certainly makes me squeamish. Would probably pass BRF testing - I'm more concerned about possible PT problems.

Do any of you have plans utilizing such an arrangement? We have a few plans that charge a nominal administrative fee to terminated participants only, but nothing like the above arrangement.

I think you need to look at the "significant detriment" rule.

https://www.law.cornell.edu/cfr/text/26/1.411(a)-11

I quote:

(i) No consent is valid unless the participant has received a general description of the material features of the optional forms of benefit available under the plan. In addition, so long as a benefit is immediately distributable, a participant must be informed of the right, if any, to defer receipt of the distribution. Furthermore, consent is not valid if a significant detriment is imposed under the plan on any participant who does not consent to a distribution. Whether or not a significant detriment is imposed shall be determined by the Commissioner by examining the particular facts and circumstances.

It is my understanding singling out just terms for a fee can run afoul of that significant detriment rule. 

https://blog.acgworldwide.com/charging-fees-to-terminated-plan-participants-okay-in-some-cases

This guy seems to think it is a problem.

The employer charges an account maintenance fee that applies only to terminated employees. This fee is not associated with any service performed for the plan.  It’s just a way of encouraging former employees to move their money out of the plan.  Such a fee does not appear to be permissible.

You might want to Google the term significant detriment and see what you come up with. 

Hope that helps.

Thank you for the response! I'll look into it. I was basing my initial basic "investigation" more on DOL guidance - specifically including FAB 2003-3 - see excerpt below. At BEST, the whole thing is a very tricky area, and if the Fiduciary wants to proceed with this, we'd recommend ERISA counsel. I'm not at all confident that investment fund fees are necessarily an expense for "administration" of the plan, so input/opinions from the gurus here are very helpful in separating the wheat from the chaff. 

Accounts of Separated Vested Participants. Some plans, with respect to which the plan sponsor generally pays the administrative expenses of the plan, provide for the assessment of administrative expenses against participants who have separated from employment. In general, it is permissible to charge the reasonable expenses of administering a plan to the individual accounts of the plan’s participants and beneficiaries. Nothing in Title I of ERISA limits the ability of a plan sponsor to pay only certain plan expenses or only expenses on behalf of certain plan participants. In the latter case, such payments by a plan sponsor on behalf of certain plan participants are equivalent to the plan sponsor providing an increased benefit to those employees on whose behalf the expenses are paid. Therefore, plans may charge vested separated participant accounts the account’s share (e.g., pro rata or per capita) of reasonable plan expenses, without regard to whether the accounts of active participants are charged such expenses and without regard to whether the vested separated participant was afforded the option of withdrawing the funds from his or her account or the option to roll the funds over to another plan or individual retirement account.

Yes, I have experience with situations in which an employer absorbs plan-administration expenses for only those of the participants who are current employees.

The key about the significant-detriment rule is that a no-longer-employed participant’s account must be charged no more than her fair share of plan-administration expenses.

Unless the plan’s documents expressly obligate the employer to pay the plan’s expenses, a plan may charge the plan’s prudently incurred reasonable expenses against the individual accounts of the plan’s participants, beneficiaries, and alternate payees. “Nothing in Title I of ERISA limits the ability of a plan sponsor to pay only certain plan expenses[,] or only expenses on behalf of certain plan participants. [S]uch payments by a plan sponsor on behalf of [some] plan participants are equivalent to the plan sponsor providing an increased benefit to those employees on whose behalf the expenses are paid. Therefore, [a] plan[] may charge vested separated participant accounts the account’s share ([for example], pro rata or per capita) of reasonable plan expenses, without regard to whether the accounts of active participants are [not] charged such expenses[.]” DoL-EBSA, Allocation of Expenses in a Defined Contribution Plan, Field Assistance Bulletin 2003-3 (May 19, 2003).

However, a retirement plan must provide that a vested benefit that exceeds $5,000 (or, soon, $7,000) may not be distributed before normal retirement age without the participant’s consent. ERISA § 203(e)(1), 29 U.S.C. § 1053(e)(1); accord I.R.C. (26 U.S.C.) § 411(a)(11)(A).

Interpreting both the tax-qualified-plan condition and the ERISA provision, a Treasury rule provides that a participant’s “consent” to a distribution is invalid if the plan imposed a “significant detriment” on a participant who doesn’t consent. 26 C.F.R. § 1.411(a)-11(c)(2)(i).

To interpret this significant-detriment rule, the Internal Revenue Service stated its view that a plan may charge the accounts of former employees (even while not charging current employees) if the expense otherwise is proper and a severed participant’s account bears no more than its “fair share” of the plan’s expense. The Revenue Ruling expressly cautions that former employees’ accounts must not subsidize current employees’ accounts. But a plan doesn’t run afoul of the significant-detriment rule merely because it charges beneficiaries’, alternate payees’, and severed participants’ accounts the charge that would fairly result if the administrator allocated expenses uniformly among all individuals’ accounts. Rev. Rul. 2004-10, 2004-7 I.R.B. 484, 485 (Feb. 17, 2004).

Whether a particular allocation of plan-administration expenses meets that standard and otherwise is proper in particular circumstances turns on all the documents, facts, and circumstances.

Agree with Peter. The example from ESOP guy seemed to indicate the employer was charging a fee to terms to encourage plan exit, which I agree would be a no-no. However, if an account fee of $x or Xbp was charged on all accounts but the employer chose to pay this on only for terminated folks then I see no problem with that assuming such fees are reasonable.

We have an ESOP that charges a fee to terminated participants once the terminated participant has the ability to take a distribution.  Actives and terminated participants who are unable to take a distribution under the terms of the plan are not charged.  The amount of the fee is based on the cost of recordkeeping and administrative fees divided by the number of participants.

That’s similar to a method I’ve seen. If the recordkeeper’s fee for a quarter-year is $4,250 and there are accounts for 120 individuals (counting all participants, beneficiaries, and alternate payees), a no-longer-employed participant is charged $35.41 for that quarter-year.

Thanks. In this case, it is a percentage of th4e overall fund balance. So if you have 10% of the plan assets in your account, and the overall investment fee is $10,000, then your share is $1,000.

Where I'm particularly uneasy is if the employer is contractually obligated to pay this fee under the agreement with the recordkeeper (and I don't know if that's the case) then charging it to the participant is relieving the employer from paying this fee - possible PT? 

You’re right that a fiduciary should get its lawyer’s advice about:

(i) whether an agreement with the service provider obligates the employer to pay the provider’s fee; and if so,

(ii) whether a charge on individuals’ accounts that relieves the employer of some of its obligation is a nonexempt prohibited transaction.

Another path is to revise the service agreement to make clear that only the plan is obligated to pay the provider’s fee. The agreement might also state that the employer has a right, but no obligation, to pay a portion of the fee.

Thanks to all - the information and discussion is very helpful. If this employer is like most, (of our small employers, anyway) they will drop this whole idea rather than pay attorney fees. We'll see where it goes.