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 a financial advisor in New York is representative of a common question related to defined contribution plan fees. The advisor asked:
"Can a plan charge fees to terminated participants but not active participants?"
Highlights of Discussion
- A plan can charge administrative expenses to terminated participants but not active participants, if the language of the plan document accommodates such a practice. Both the DOL and the IRS have concluded that a plan may charge administrative expenses to terminated participants, while not charging active participants, provided the method used meets certain criteria.
- DOL Field Assistance Bulletin (FAB) 2003-3 grants plan sponsors considerable discretion when determining how plan expenses will be allocated among participants and beneficiaries, as long as the method used is prudent, done solely in the interest of plan participants and does not create a prohibited transaction. An example included in FAB 2003-3 specifically states that, “…plans may charge vested separated participant accounts the account's share (e.g., pro rata or per capita) of reasonable plan expenses, without regard to whether the accounts of active participants are charged such expenses…”
- Similarly, the IRS concluded in Revenue Ruling 2004-10 that a plan sponsor may charge certain plan expenses to former plan participants and not active participants, provided the expenses are proper, reasonable and the allocation method is not discriminatory.
- From the IRS’ perspective, not every method of allocating plan expenses is reasonable, and a method that is not reasonable could be deemed impermissible. For example, allocating the expenses of active employees pro rata to all accounts, including the accounts of both active and former employees, while allocating the expenses of former employees only to their accounts would not be reasonable since former employees would be bearing more than an equitable portion of the plan's expenses. Accordingly, such an allocation of expenses could be a significant detriment and, therefore, disallowed.
- Plan sponsors should always consult the language of their plan documents for specific provisions relating to the allocation of plan expenses.
Conclusion
The DOL and IRS have concluded that a plan may charge administrative expenses to terminated participants, while not charging active participants, provided the method is not a breach of fiduciary responsibility, and the expenses are proper, reasonable and done in a nondiscriminatory manner. If the plan includes specific provisions that address the allocation of expenses, the sponsor must follow them.
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.
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