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Retirement Doctor: DOL Guidance for Paying   401(k) Fees from Plan Assets

Nov 2, 2018 10:05:59 AM / by Mike Rogers

 

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One of the most common questions I get from 401(k) Plan Sponsors is “What 401(k) fees are eligible to be paid from plan assets?” This confusion is hardly surprising when you consider the broad range of 401(k) fees a plan can incur. With all the focus on fees and with dwindling benefit budgets, many firms are trying to pass along as much of the expense as they can.


However, if you’re a 401(k) sponsor, you have little choice but to know what 401(k) fees can be paid by your plan due to your fiduciary responsibility to pay only “necessary” and “reasonable” fees from plan assets. Otherwise, you risk paying fees that improperly reduce participant returns and trigger fiduciary liability.


The good news is that it’s easy to stay out of trouble. The Department of Labor (DOL) divides 401(k) fees into two categories – administrative expenses that are allowed to be paid from plan assets, and settlor expenses that are not. Before you pay a 401(k) fee from plan assets, you just need to confirm it fits the proper category. Here’s a guide to what you need to know.


Administrative vs. Settlor Expenses


The DOL divides 401(k) fees into two categories – administrative and settlor expenses. In general, administration expenses cover plan administration and investment management. These expenses are considered by the DOL to benefit 401(k) plan participants exclusively. Settlor expenses, on the other hand, are considered to benefit the 401(k) Plan Sponsor in more than an incidental way. Common settlor expenses include consulting fees for professional guidance during the plan formation, design or termination process.


Because any expense paid by a 401(k) plan reduces participant investment returns, the DOL only wants expenses that benefit participants to be paid from plan assets. For this reason, settlor fees must be paid by the plan sponsor. However, there are a few twists to this rule. When 401(k) plan participants are considered to derive some benefit from a settlor expense, the sponsor can charge that portion to the plan. Further, plan expenses necessary to implement a settlor decision can be paid from plan assets as an administrative expense.


For examples of common 401(k) plan administrative and settlor expenses, see the chart below:


Plan Stage

Activity

Administrative Expense

Settlor Expense

Plan Formation

Plan setup – including participant account establishment and systems (trust, recordkeeping, billing) setup

X

 

Plan design consulting

 

X

Controlled group consulting

 

X

Provider search

 

X

Plan Management

Annual plan administration - including asset custody, participant recordkeeping, and ERISA compliance (Form 5500 preparation, nondiscrimination testing, participant disclosure)

X

 

Investment advice - including fund menu selection and professional portfolio management

X

 

Plan amendments (discretionary)

 

X

Plan amendments (legally-required)

X

 

Participant distributions, loans and QDRO splits

X

 

Enrollment meetings or participant education materials

X

 

Statement mailings

X

 

Investment fund adds, drops, replacements

X

 

Plan audit by independent CPA

X

 

Independent appraisal of hard-to-value assets or employer stock

X

 

Fidelity bond

X

 

Correction of late Form 5500 filings under the DOL’s DFVC Program - including consulting fees, legal fees, and DOL penalties

 

X

Correction of late deferrals and other fiduciary violations under the DOL’s VFC Program - including consulting fees, legal fees, and DOL penalties

 

X

Plan Termination

Legal and consulting expenses - e.g., drafting the resolution to terminate the plan

 

X

401(k) provider contract termination fees

X

 

Investment surrender charges

X

 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsure of a 401(k) fee? Pay it from a corporate account

As a 401(k) plan sponsor, you have a fiduciary responsibility to only pay 401(k) fees from plan assets that are both “reasonable” and “necessary.” However, not all 401(k) fees will fit cleanly into the administrative or settlor category. When this is the case, the safe course is not paying these fees from plan assets – and instead pay them from a corporate account.

If you have any questions or would like to discuss any of the above items, please feel free to contact me.

Topics: ERISA, best practices, 401(k) plan, 401(k), 401(k) plan sponsor, Audit, Retirement Doctor

Mike Rogers

Written by Mike Rogers

Mike is an industry veteran with 30 years of experience in every aspect of retirement planning, including registered investment advisory, third party administration, and record keeping. His list of credentials is as extensive as it is impressive: Qualified Pension Administrator (QPA), Qualified 401K Administrator (QKA), Certified Pension Consultant (CPC), Qualified Pension Financial Consultant (QPFC), Accredited Investment Fiduciary (AIF®), Tax Exempt and Governmental Plan Consultant (TGPC), Certified Behavioral Finance Analyst (CBFA), Professional Plan Consultant (PPC), Global Fiduciary Strategist (GFS). Mike is also a former member of the Schwab SRT Technologies Advisory Board, Schwab TPA Advisory Board, and Fidelity/IBG Advisory Board.

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