The Department of Labor (DOL) has been known to investigate the reasonableness of retirement plan expenses and the proper use of plan fees. In some cases, the agency has found plans to be in violation for fee-related infringements, which has led to costly assessments to the plan sponsors in question. If your organization sponsors a retirement plan for its employees, you need to pay close attention to its expenses and fees.
Plan assets are designated for the exclusive purpose of providing a retirement benefit to plan participants, and plan sponsors cannot directly benefit from plan assets. In other words, use of retirement funds for company purposes is against the law.
But plan sponsors may use certain retirement funds to pay allowable administrative and other plan-related expenses. The plan document, however, must authorize any payments for expenses; the payment must be in the plan participants’ and beneficiaries’ interest; and the amount paid from the plan must be reasonable.
The “reasonableness” test is somewhat subjective but ultimately boils down to having a process that demonstrates due diligence. Independent benchmarking services are available to help determine reasonableness based on plan assets and number of participants.
In cases of hiring and paying fees to third-party administrators (TPAs), as plan sponsor you should make a reasonable attempt to understand local market prices for this service. Most important, research the integrity and ability of the TPA, because the TPA will guide you with respect to your fiduciary duties.
Often, the TPA receives remuneration directly from the trust assets, which both the IRS and DOL allow. Generally, allowable expenses from a plan include costs of:
- Calculating and communicating benefits to participants,
- Nondiscrimination testing,
- Amending the plan to comply with tax law changes,
- Obtaining an IRS determination letter,
- Certain plan amendments,
- Distribution and loan fee expenses,
- Fees related to qualified domestic relations orders, and
- Other administrative fees.
Certain expenses aren’t allowed, including the costs of plan design changes.
Questions and answers
Bear in mind that, along with the oversight of the DOL, the IRS also carefully monitors plans for reasonableness and mirrors many of the DOL’s actions. We can help you ask the right questions and find the right answers when monitoring your retirement plan’s expenses and fees.