InspectingFinancialsMuch has been written in recent years about fee transparency within retirement plans, with the overwhelming majority of the focus centered on defined contribution plans.  This is a result of law changes aimed at getting record keepers and investment advisors to more fully disclose the sources of their revenue. With more information, plan fiduciaries can fulfill their duties in making sure that only reasonable and appropriate “plan related” expenses are being paid from plan assets.  The purpose of this article is to help fiduciaries who oversee defined benefit pension plans to better understand the process of determining which plan expenses may be eligible to be paid from trust assets.

Before we begin, it is important to note that any decision to pay fees and expenses from a tax-qualified retirement trust is a fiduciary decision which must ultimately be made by the plan fiduciaries and their ERISA attorneys.  This article should not be construed as legal advice, but rather a guide to aide plan sponsors and their attorneys with decision making in this area.

The impetus for the retirement plan fee transparency laws enacted several years ago was a series of class action lawsuits brought against sponsors of 401(k) plans.  While the focus of the new laws was largely toward 401(k) plans, they apply to all ERISA retirement plans including traditional pension plans.  Plan sponsors then need to ask themselves, “Am I handling expenses correctly with my pension plan?  If not, am I elevating fiduciary risks for myself and my company? “

To answer these questions we must review some ERISA and fiduciary basics:

  1. According to ERISA sections 403 and 404, retirement plan assets can only be held in trust for the “exclusive purpose” and benefit of plan participants
  2. Only if the written plan document allows, plan sponsors may defray reasonable expenses of administering the plan by paying those expenses from plan assets
  3. The U.S. Department of Labor (DOL) has clarified what constitutes a plan expense by separating those from “settlor” expenses, i.e., non-plan-related expenses that relate to or benefit the plan sponsor company
  4. Fiduciaries must therefore always distinguish between “plan related” and “settlor” expenses
  5. Fiduciaries must then determine if the “plan related” expenses are “reasonable”

Below are a few examples demonstrating situations which are commonly deemed plan-related vs. settlor in nature:

  1. Actuarial fees to perform cash funding valuations – plan related
  2. Actuarial fees to perform company accounting valuations under US GAAP/ASC 715 – settlor
  3. Studies to consider discretionary plan design changes (e.g., cost savings) – settlor
  4. Studies to consider impact of mandated plan design changes (e.g. law changes) – plan related
  5. Cost to implement any plan design changes, once adopted – plan related
  6. Routine government filings, plan administration, PBGC premiums – plan related
  7. Cost of performing an Asset/Liability study (to fulfill fiduciary responsibility) – plan related
  8. Cost of performing Asset/Liability forecast (to project company expense for business planning purposes) – settlor

These examples demonstrate that it is not always clear if a fee charged by an outside provider would be deemed plan related or settlor in nature by the U.S. DOL, IRS or the Courts.

Once a fiduciary filters through this process to determine if an expense qualifies to be trust payable, documentation is critical as a defense to any potential legal action or audit from the government.  What are some of the potential ramifications of paying ineligible expenses from trust assets?  That is a discussion best held with ERISA counsel, but some ramifications may include:

  • breach of fiduciary duty,
  • deemed prohibited transactions,
  • fines and penalties to the government,
  • money owed back to the plan, and more.

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If you are uncertain as to how well your past practices adhere to the fiduciaries rules and standards, we recommend conducting a focused compliance review in this area before your plan undergoes scrutiny from the IRS or DOL.  Even if your plan doesn’t get audited by the DOL or IRS, plan operations will certainly be reviewed by both the IRS and DOL during the plan termination process.  Like they say, an ounce of prevention is worth more than a pound of cure.

If you aren’t sure how to proceed with a focused compliance review of your pension plan or want more information about plan fee transparency, give one of our pension experts a call to set up a free, no-obligation consultation at (312) 762-5945 or email Kathy Tompkins now.


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