Starting and maintaining a retirement plan can be expensive. If you are like many employers, particularly those with over-funded defined benefit plans, you are probably interested in getting the most out of your plan's excess assets. Or, if you sponsor a defined contribution plan and are experiencing cash flow problems, you might be looking for ways to shift some of the costs of maintaining the plan to the plan itself and its participants.
Expenses can be paid by the employer or from plan assets, but the rules on who pays what are strict. Be careful. Any violation can be considered a fiduciary breach with penalties of 20 percent on amounts the government recovers.
The Department of Labor (DOL) started a plan expense investigation program. It examined situations where employers used plan assets to pay the expenses of running the plan. It found a large number of cases where most of the plan's administration expenses and even implementation costs were paid from plan assets. The question arose: which expenses paid by the plan actually benefit the employer? The DOL has attempted to clarify this issue.
One of a plan fiduciary's responsibilities is to determine whether to pay an expense out of plan assets. The assets of an employer-sponsored retirement plan must not benefit the employer. Their purpose is to provide benefits to participants and beneficiaries, and pay reasonable expenses of administering the plan, subject to certain exceptions. Plan fiduciaries must act prudently and solely in the interest of the plan's participants and beneficiaries.
As a general rule, reasonable expenses of administering a plan include direct expenses for a fiduciary's responsibilities. The DOL has taken the position that there is a class of discretionary activities which relate to the formation of, rather than the management of, plans. These "settlor" functions include the design, establishment, and termination of plans and must be paid by the employer and are not fiduciary activities. Therefore, such expenses should not be paid from plan assets.
Settlor functions are for the benefit of the employer and involve services that an employer could reasonably be expected to pay in the normal course of its business operations. However, expenses for the implementation of a settlor's decision would generally be paid by the plan. These might include drafting plan amendments required by changes in the tax law, nondiscrimination testing, and requesting IRS determination letters.
There are several versions of the DOL's list of expenses to be reviewed under its investigation program. However, there is one expense that appears to be getting more attention: the cost to maintain the tax-qualified status of a plan.
The DOL has expressed the view that the tax-qualified status of a plan benefits the employer and the plan participants. Therefore, the expense to maintain this status must be shared between the employer sponsoring the plan and the plan itself. If, on the other hand, maintaining the plan's tax-qualified status involves an analysis of options for amending the plan, and the plan sponsor makes the choice, the expense of analyzing these options would be paid by the settlor.
Do you have a low-cost bundled plan you bought from a financial institution? Review the fee schedules. Did you have to pay any of the initial costs? Do you have to pay any of the ongoing costs? If the DOL finds that your financial institution's bundled fees include, for example, plan implementation or payment to maintain tax-qualified status, you could be in for trouble.
There are no set guidelines as to what to do. And it can get more complicated if you are the plan sponsor and act both in a settlor capacity and in a fiduciary capacity for your employees. Plan sponsors often consider it well worth the cost to have an independent fiduciary determine how to allocate the expenses just in case the DOL comes knocking on your door. Remember, the burden is on you to justify how those expenses were shared.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.