By Jeff Chang
Not surprisingly, many cities and special districts no longer have monies available in their budgets to spend on things such as legal fees to analyze and correct plan administration problems and compliance issues. When it is not feasible for the plan sponsor to pay for certain expenses relating to the maintenance and administration of its defined contribution plans, it may be possible to have the affected plans pay such expenses.
Practically all defined contribution plan recordkeepers offer a “plan administration expense account” or “plan expense reimbursement account” feature as part of their services. This should be documented as part of a plan’s administrative services agreement and a plan document also must provide that reasonable plan administration expenses, as determined by the plan administrator, may be paid from the plan’s assets.
Depending on a recordkeeper’s systems and capabilities, it can either “collect” a specified percentage (e.g., 1 basis point) or a specified dollar amount (e.g., $5,000) from all participants’ accounts and hold that amount in a separate account for use by the plan administrator to pay or reimburse what it determines are reasonable and necessary plan administration expenses. Some recordkeepers can simply collect certain plan administration expenses from accounts on an ad hoc basis and pay them directly to vendors, when directed by the plan administrator. These might include fees for an independent financial audit of the plan, certain legal fees relating to plan administration matters, banking fees, mailing fees, etc. Because these payments are coming out of plan assets, it is important that they not be misused by the employer, or plan fiduciaries, either for general employer expenses (non-plan-related expenses) or for “settlor” expenses – expenses related to the design, adoption or termination of the plan. Violation of these restrictions are a violation of the basic fiduciary duties set forth in the California Constitution.
To have a plan pay a greater share of its plan administration fees and costs, there are a few things to bear in mind:
- Reimbursements of plan expenses already paid by the employer need to be carefully documented and must be made soon after they have been paid – paid years ago can’t be reimbursed.
- Amounts that are held in a separate account (unallocated) from participant accounts must be properly utilized or reallocated back to participant accounts by plan year-end.
- Even though the category of expense (e.g., plan audit fees) may be clearly administrative, the amount of the payment or reimbursement must be reasonable and appropriate to the services provided.
- Like any other fiduciary decision, procedural prudence dictates that each payment and reimbursement be carefully considered, by the right persons, and properly documented.
Serious legal consequences can result from the improper use of plan assets. Any questions should be discussed in advance with appropriate legal counsel.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.