Case of the Week: Guidance on Allocating Expenses Among Participants

John Carl

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Illinois is representative of a common inquiry regarding plan fees. The advisor asked:

“What guidance is available for allocating plan expenses among 401(k) plan participants?”

ERISA contains no provisions specifically addressing how plan expenses should be allocated among participants and beneficiaries. Therefore, plan 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.

In an effort to provide some guidance, the DOL issued Field Assistance Bulletin 2003-3 (FAB 2003-3), in which it addresses the issue: “What rules apply to how expenses are allocated among plan participants in a defined contribution plan?”

The DOL suggest the starting point should be a review of the governing plan documents. If the method of allocating expenses is set forth in the plan document, plan sponsor will be required to follow the prescribed method of allocation. The sponsor could amend the document to change methods, however.

When the plan documents are silent or ambiguous on this issue, fiduciaries must select the method or methods for allocating plan expenses. According to FAB 2003-3, the plan sponsor — as fiduciary — must follow a prudent process, weighing the competing interests of various classes of the plan’s participants and the effects of various allocation methods on those interests. The fiduciary’s decision must be made “solely in the interest of participants.” The FAB goes on to explain that a method of allocating expenses would not fail to meet this exclusive benefit standard merely because the selected method disfavors one class of participants, provided that a rational basis exists for the selected method. Documentation would be critical on this point.

The DOL warns if a method of allocation has no reasonable relationship to the services furnished or available to an individual account, a case might be made that the fiduciary breached his or her fiduciary duties to act prudently and solely in the interest of participants in selecting the allocation method.

The FAB confirms that pro rata and per capita methods of allocating expenses could be equally reasonable methods given the circumstances. For example, with respect to investment advice services to individual participants, a fiduciary may be able to justify the allocation of such expenses on either a pro rata or per capita basis. Alternatively, investment advice services could also be charged on a utilization basis, whereby the expense will be allocated to an individual account solely on the basis of whether a participant uses the services.

Other examples of expenses that may be allocated solely to particular participants’ accounts, rather than allocated among the accounts of all participants (e.g., on a pro rata or per capita basis), include hardship withdrawals, calculations of benefits payable under different plan distribution options, benefit distributions, accounts of separated vested participants, Qualified Domestic Relations Orders and Qualified Medial Child support Orders.

Conclusion

Ideally, the governing plan documents will specify the method for allocating plan expenses. If they do not, plan sponsors have a degree of leeway in determining the approach, provided it is determined using a prudent process that is solely in the best interest of participants.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

© 2016 Columbia Management Investment Advisers, LLC. Used with permission.

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