Retirement Plan Jeopardy: Who Pays that Fee?

Fees have got to be the most asked about and least understood topic that comes up in my discussions with clients and prospects. I’ve heard dozens of different questions related to fees over the years, but a few stand out both in terms of how often they’re asked and their importance. Below we’ll look as these questions and the answers.

Are My Retirement Plan Fees Too High?

This is the most important from a plan perspective and the most often asked question, and it’s an excellent one because more often than not there is no reference point to know what’s high and what’s low.

The answer depends on the plan, but if the plan isn’t designed to work with an independent third party administrator (TPA) like PlanPerferfect, it’s more than likely that the fees are too high.

How do I uncover hidden fees in my Retirement Plan?

Hidden fees are very tricky, and can be difficult to uncover if you don’t know where to look. It just so happens that an experience TPA like PlanPerfect knows exactly where to look to find those hidden fees so you can get a more detailed and accurate picture of where your money is going.

How much should my plan pay in fees for ______ service?”

Not to beat my own drum too much, but again working with a TPA will help you answer this question. The ideal amount to pay in fees will vary depending on the type of plan that you have for your organization, so consult with your TPA to get the information you need.

Who is responsible for paying specific types of plan fees?

This is another not so obvious question that comes up in my chats with clients more often than you would think.

From a plan perspective there are two types of expenses—settlor expenses and plan expenses.   However, confusion arises because it is not always obvious what category an expense falls into.

To sort things out, there are hard and fast rules to follow when sifting through expenses in order to categorize them properly and figure out who pays them.

Settlor Expenses

Settlor expenses arise from voluntary activities related to the establishment, design, and termination of a plan, or are expenditures that benefit the plan sponsor. Settlor expenses can’t be paid from plan assets, they must be paid by the employer.

Plan Expenses

In general, plan expenses are reasonable necessary administrative expenses for keeping the plan in compliance with the law and expenditures that benefit plan participants and beneficiaries. Plan expenses should be paid from plan assets.

Examples of Expenses Categorization

Plan Adoption 

• The adoption of a new plan is considered a settlor function.

• The implementation of the plan (setup, recordkeeping, and administration) is a plan expense.

Plan Amendments  

• Discretionary amendments, including changes to participant eligibility, benefit formulas, and distribution provisions, are settlor expenses.

• Fees for maintaining the plan’s tax-qualified status, including drafting amendments required by tax law changes are generally plan expenses.

Plan Termination 

• The expense of studying the cost of plan termination and deciding to terminate the plan is a settlor function.

• Implementation of the plan termination decision is a plan expense.

Penalties and Fees  

• These are settlor expenses that cannot be paid from plan assets.  These expenses include fees paid for various governmental correction programs such (VCP, Audit Cap, DFVCP, and VFCP).

As you well know, they’re many more plan adoption and implementation expenses that you probably won’t mind a little more clarity around.

I encourage you to read the attached white paper particularly the chart at the back, which breaks down these expenses according to who is responsible for paying them.