Reasonable Expenses

The Exclusive Benefit rule also applies to payment of expenses from plan assets by requiring that fiduciaries discharge their duties for the exclusive purpose of defraying reasonable expenses of administering the plan. Plan fiduciaries typically engage several service providers to facilitate plan administration, including investment professionals, recordkeepers, accountants, trustees, and insurance companies. The investment vehicles selected by the plan fiduciaries often have their own fees that are charged against plan assets. According to the DOL, a plan can pay its own expenses, provided the plan documents do not prohibit it from doing so. Ideally, the plan’s terms should provide for the plan's payment of appropriate expenses. One common challenge with plan expenses is determining which expenses associated with the plan are plan expenses, as opposed to employer expenses, and whether to allocate such plan expenses among participant accounts. Fortunately, the DOL has issued guidance regarding what expenses can be paid by the plan, as well as issues relating to allocating such expenses to participants:

  • Settlor vs. Plan Expenses. In 2001, the DOL issued PWBA Advisory Opinion 2001-01A, which provides guidance, including six examples, explaining the distinction between settlor expenses and plan expenses. This distinction is crucial, because only plan expenses are properly payable by the plan. Settlor expenses are expenses related to the plan but incurred by the settlor, typically the employer, in its capacity as settlor. For example, plan amendments driven purely by plan design considerations, as opposed to tax qualification requirements, are settlor expenses that the plan therefore cannot pay. Plan expenses are expenses related to the plan's administration, incurred by the fiduciary in its fiduciary capacity. For example, trustee and recordkeeping fees are plan expenses that the plan can pay if the plan's named fiduciary has determined that such expenses are reasonable.
  • Expense allocation in defined contribution plans. According to the DOL and the IRS, neither ERISA nor the Code necessarily prohibits the allocation of plan expenses attributable to participants who are not active employees while the employer pays the corresponding expenses on behalf of participants who are active employees. Further, if a plan expense, such as the expense of evaluating the qualified status of a domestic relations order, is attributable to a particular participant, it may be permissible for the expense to be allocated solely to that participant's account. The overarching consideration regarding the allocation of expenses is whether the expense allocation is reasonable when taking into account all of the facts and circumstances.

This guidance should govern all allocation decisions, including whether to allocate a particular expense among participant accounts on a per capita or pro rata basis. Further, under the Code, expense allocations must not discriminate in favor of highly compensated employees under Code Section 401(a)(4). (Please see DOL FAB 2003-3 and Internal Revenue Service Revenue Ruling 2004-10.)

Another difficulty can be determining whether an expense is "reasonable." According to DOL guidance, fees must be reasonable compensation for "helpful" or "necessary" services. Ultimately, reasonableness is a factual determination. Among the factors a fiduciary may take into account when assessing reasonableness is the value of the services provided. The DOL has noted that the least expensive service provider may not necessarily be the best service provider for the plan. Having a process in place for plan fiduciaries to periodically review the fees and services provided to the plan can assist in demonstrating that fiduciaries acted in a prudent manner in paying plan expenses.

Sources:

DOL Advisory Opinion on Settlor v. Plan Expenses: PWBA Advisory Opinion 2001-01A


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Fidelity does not provide legal advice, and the information provided herein is general in nature and should not be considered legal advice. Consult an attorney regarding your plan's specific legal situation.

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