The U.S. Department of Labor (DOL) recently issued Field Assistance Bulletin 2003-3 (FAB), which analyzes the payment of the expenses of qualified plans, a complex issue for plan administrators. Before the FAB was issued, there was little guidance on the manner in which expenses could be charged to plans, and it was unclear in many cases whether expenses could be charged directly to plan participants’ accounts. The FAB, available at www.dol.gov/ebsa/regs/fab_2003-3.html, not only greatly expands the guidance on this issue, but also reverses an opinion issued by the DOL almost 10 years ago.
Charging Plan Expenses to Plan Participants’ Accounts
In all instances of charging expenses to the plan, the first step is determining if the expense at issue is a proper plan expense and the amount is reasonable in relation to the service for which it is charged. Settlor functions, such as decisions relating to the establishment, design and termination of plans, generally are not expenses that can be charged to the plan. Reasonable expenses incurred by the fiduciary’s administration of the plan and the fiduciary’s implementation of settlor decisions generally may be charged to the plan. DOL Advisory Opinions 97-03A and 2001-01A provide guidance on determining which expenses may be charged to the plan.
Once it is determined that the expense is both a reasonable amount, a legitimate plan expense and, thus, may be charged to the plan, the question remains as to how to allocate the expense. Charging expenses to defined benefit plans is less complicated because the expense is simply charged to the pension trust as a whole. Defined contribution plans present more difficulties because, aside from any pool of excess funds that may be left over after forfeitures, there are only individual participants’ accounts to which plan expenses can be charged. Therefore, the decision must be made as to how expenses should be allocated among the individual participants’ accounts. The FAB explains how this decision should be made.
In certain cases, the Employee Retirement Income Security Act, as amended (ERISA) specifies the procedure. For example, ERISA allows plan administrators to charge a reasonable amount to participants or beneficiaries who request copies of plan documents. ERISA allows group health plans to charge up to 102 percent of the cost of premiums to participants or beneficiaries if they elect to continue COBRA coverage under the plan. If ERISA does not specify how a certain expense is to be charged, the next step is to review plan documents. If plan documents specify how the expense is to be allocated, then the fiduciary is required to follow that procedure. The FAB notes that “[w]hen set forth in plan documents, the method of allocating expenses, in effect, becomes part of defining the benefit entitlements under the plan.”
If ERISA and plan documents are silent on the issue, then the plan fiduciary must decide how plan expenses are to be allocated. According to the DOL, “[P]lan sponsors and fiduciaries have considerable discretion in determining, as a matter of plan design or a matter of plan administration, how plan expenses will be allocated among participants and beneficiaries.” The plan fiduciary must weigh the competing interests of different classes of the plan’s participants and the effects that the various allocation methods would have on those interests. The fiduciary’s decision must be solely in the interest of the plan participants. In other words, there must be a rational basis for selecting the particular method.
The pro rata method of allocating (allocating a proportion of the expense based on the size of each individual account) is considered reasonable in most cases. The per capita method (charging the same amount to each account, regardless of the size of the account) is also reasonable for allocating certain types of administrative expenses, such as record keeping, legal, auditing, annual reporting and claims processing. Where fees to the plan are determined on the basis of account balances, such as fees for investment management services, a per capita method may appear illogical. The fiduciary has considerable discretion, but it is imperative that he or she weighs the options in order to come to a reasonable decision.
Charging Plan Expenses to Individual Participants
Prior to the FAB, if the expense at issue related to individual participants, rather than the group of plan participants as a whole, the rule was different. In DOL Advisory Opinion 94-32A, the DOL explained that expenses associated with participant rights that were optional under ERISA (such as a participant’s option to obtain a loan from the plan or to direct his or her investments) could be charged to an individual participant’s account. However, expenses associated with a participant’s rights under ERISA (such as the costs associated with processing a qualified domestic relations order or obtaining a distribution) could not be charged to the individual’s account.
The FAB directly overrules this prior guidance. The DOL’s new position is that the same principles discussed above will apply in determining the permissibility of charging individuals rather than the plan as a whole. Therefore, plan administrators may charge individual participants’ accounts for plan expenses as long as the fiduciaries have gone through a deliberative process to determine that the charge is properly payable by the plan (i.e., is not a settlor expense), and the charge is reasonable in relation to the service to which the expense relates.
The DOL lists the following specific examples of expenses that may reasonably be charged to individual participants:
Expenses related to the administration of hardship withdrawals may be charged to participants who request the withdrawal.
Defined contribution plans may charge participants for a calculation of benefits payable under different distribution options available under the plan.
Expenses related to the distribution of benefits (such as a monthly check writing expense) may be charged to the participant to whom the distribution is being made.
Plans may charge the account’s share of reasonable plan expenses to vested separated participant accounts 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.
Expenses related to the administration of qualified domestic relations orders (QDROs) and qualified medical child support order (QMCSOs) determinations may be charged to the account of the participant or beneficiary seeking the determination.
Implications for Employers
In light of this newly released guidance, it is anticipated that more plan sponsors will charge their plan expenses to participants’ accounts. Those plan sponsors who already charge their participants’ accounts for expenses should review their documents and procedures carefully. Plan sponsors should consider whether their plans should be amended to direct the charging of expenses. Once the procedures are in the plan, the need for the fiduciary decision-making process is minimized, thereby simplifying the process. Whether amending the plan, deciding how to allocate expenses among all participants or deciding to charge individual participants for expenses, plan sponsors and administrators must remember three crucial points.
Fiduciary, Not Settlor, Act
The plan administrator must be aware of what “hat” he or she is wearing. The plan sponsor generally does not act as a fiduciary in amending the plan, but the plan administrator acts as a fiduciary in determining what expenses are payable by the plan and how such expenses should be allocated.
Process Is Crucial
The process itself is key in making these decisions. Be sure the fiduciary has gone through the analysis of weighing the options and has some rational basis for making the decision he or she has made. The fiduciary should document this analysis. Extra caution is required if the fiduciary making the decision is also a participant of the plan. If the decision gives any benefit to the fiduciary that is more than incidental, then it may be considered a prohibited transaction.
SPD Must Notify Participants of Charges
Make sure the summary plan description reflects any participant charges that are implemented. It is important that participants be made aware of any fees or charges that could affect their accounts.
Finally, expect scrutiny from the DOL. The DOL will be watching to ensure plan administrators are going through the required deliberative process, and the amount of discretion allowed by these new rules is not being abused at the expense of participants.