Who pays the retirement plan fees? Should the plan sponsor pay? What about the participant? Maybe a mix of both? These questions are core to how our consultants help retirement plan committees frequently. The first thing to acknowledge here is that this decision is a business judgment type decision and is commonly called a “settlor” function. So, the organization that sponsors the retirement plan can make a business decision over whether they want to pay for certain retirement plan expenses. If the organization is unable or unwilling to pay for these costs, then it may be permissible to pass these costs to the 401(k) or 403(b) participants. The decision of whether an administrative expense is permissible to pass along is a fiduciary decision. Here’s a few tips on how to come to a conclusion:1. The organization must ensure that the plan document specifies if administrative expenses are allowed to be payable by the retirement plan assets.
If the document does not specify otherwise, administrative expenses generally may be paid by assets. However, if the plan document specifies that the employer will be paying plan expenses, no expenses can be paid from plan assets without the plan document amended to reflect this change. Plan provisions can also state that the employer will advance expenses on the plan’s behalf and be reimbursed by the plan at a later date. Note that the payment and reimbursement should take place within a 60-day window, otherwise the Department of Labor (DOL) requires a loan agreement between the retirement plan and the employer.
2. You must determine if an expense is allowed to be paid by the plan assets.
The DOL uses the settlor versus fiduciary distinction and has outlined some guidance in their DOL Advisory Opinion 2001-01A. For example, plan formation, termination and design costs are typically a settlor expense since they result from voluntary decisions that serve the employer’s best interests. A good rule of thumb is whether the expense is incurred for the benefit of the employer and would involve services for which an employer would expect to bear in the course of normal business. Implementation of a settlor decision is a fiduciary function and can be paid from plan assets. Other allowable expenses from due from implementing and administrating the plan include: recordkeeping, custodial, and trustee expenses, investment consulting fees, some legal fees and government reporting costs. For more information, ERISA Benefits Consulting Inc has a great blog post here.
3. Expenses paid by plan assets must be determined to be “reasonable”.
Why is this standard included here? Participants of retirement plans are reliant on their employer to negotiate the possible costs and cannot negotiate their own costs in the plan. Due to this, the DOL wants employers to ensure that they are paying reasonable fees for services passed along to plan assets. When evaluating plan expenses and measuring reasonableness, the fiduciaries of the plan must understand all direct and indirect (i.e. investment revenue sharing payments) compensation paid to plan providers. While no one benchmark exists for retirement plans, reviewing costs of similarly sized (by assets and participant count) plans in the marketplace can assist fiduciaries in determining if costs are reasonable. Involving a consultant to assist in helping with this process may be necessary if the plan sponsor does not have the tools and resources available to undertake this process themselves. Also, you may want to consider a Request for Proposal or Request for Bids to understand what pricing is available on services provided to your plan. Regardless, fiduciaries will want to document the process on how reasonable pricing was determined.
4. Be sure to evaluate your fee structure and reasonableness from time to time.
The marketplace is ever changing, consolidating, and evolving. Due to this, services and pricing for services are changing as well. It’s important to periodically undertake an evaluation effort to ensure the reasonableness of costs.
We hope this blog post provides you a solid framework you can follow if you're just getting started in evaluating your 401k fees & service providers or if you're concerned about what you may be missing. If you have more questions about your fiduciary duties to your retirement plan, feel free to download our free Fiduciary Responsibility Guide eBook below.
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