Allocating Administrative Costs: What Your Benefits Adminstrator Needs To Know

The Employee Benefit Security Administration of the Department of Labor (DOL) has recently announced a more liberal view toward charging tax-qualified retirement plan expenses against the accounts of participants in 401(k), ESOP, and other defined contribution plans. This article provides a brief overview of the kinds of expenses that plans may pay and then explains how the new DOL guidance provides employers and plan sponsors with greater flexibility in allocating these expenses to participant accounts.

Expenses that Plans May Pay: Administrative v. Settlor Decisions

Employers are not required to pay all costs associated with the maintenance of their tax-qualified retirement plans. While the DOL has long recognized that there are occasions under which plans may pay plan expenses, most employers proceed with caution in deciding to pay plan expenses from plan assets, because that decision is a fiduciary act under the Employee Retirement Income Security Act (ERISA).

Specifically, ERISA provides that, subject to certain exceptions, the assets of an employee benefit plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. ERISA Section 403(c)(1). Further, in discharging their duties under ERISA, fiduciaries must act prudently and solely in the interest of the plan participants and beneficiaries, and in accordance with the documents and instruments governing the plan provided they are consistent with the provisions of ERISA. ERISA Section 404(a)(1)(A).

The DOL has long taken the position that the above provisions prohibit an employer or other plan fiduciary from using plan assets to pay for expenses associated with decisions relating to the establishment, design, and termination of a plan. See, eg, Letter from DOL's Pension Welfare Benefit Administration to Kirk F. Maldonado (March 2, 1987). These so-called “settlor” functions are presumed to arise from an employer's sponsorship of a plan, and to involve decisions that employers make in their own best interests. Consequently, the DOL requires that employers bear all costs leading up to any settlor decision. See, eg, DOL Adv. Op. Ltr. 2001-01A (January 18, 2001).

Once an employer makes a settlor decision, plan assets may pay any expenses incurred to implement that decision. Id. Employers often pay a plan's administrative costs, but are not required to do so. When they do not, plan fiduciaries have the authority to use plan assets to pay reasonable expenses of administering a plan, including direct expenses properly and actually incurred in the performance of a fiduciary's duties to the plan. See, eg, DOL Adv. Op. Ltr. 2001-01A (January 18, 2001). Thus, for example, once a plan sponsor has decided to terminate a plan, the reasonable expenses incurred in implementing a plan termination would generally be payable by the plan. DOL Adv. Op. Ltr. 97-03A (January 23, 1987) (stating that these expenses would typically include “auditing the plan, preparing and filing annual reports, preparing benefit statements and calculating accrued benefits, notifying participants and beneficiaries of their benefits under the plan and, in certain circumstances, amending the plan to effectuate an orderly termination that benefits the participants and beneficiaries.”).

The following chart summarizes some examples of the types of plan expenses that the DOL has classified as settlor and administrative: Disclosed in Advisory Opinion 2001-01A.