What Expenses May be Paid Out of Plan Assets?
Retirement plan fees fall into two broad categories, administrative expenses and settlor expenses. Administration expenses – those covering plan administration and investments – may be paid out of retirement plan assets; settlor expenses – those incurred for plan design, establishment and termination – are specifically describes as plan sponsor expenses, i.e. those that must be paid directly by the employer establishing the plan. It’s worth noting that expenses incurred as a result of implementation of ‘settlor decisions’ may be paid out plan assets; that’s an important nuance – implementation fees in connection with settlor decisions aimed to benefit plan participants may be deemed reasonable expenses that may be paid by the retirement plan. The Department of Labor provided guidance on this issue in a variety of publications and letters.* Certain conditions should be met for payment of expenses with plan assets:
- The plan document must allow for it.
- The fees must be necessary and reasonable.
- Fees should not fall into the category of settlor expenses – business expenses related to a retirement plan and not expenses for plan administration; settlor expenses must be paid directly by the plan sponsor.
The table below provides an at-a-glance overview of the most frequently encountered expenses and their eligibility for payment with plan assets.
|Fee Description||May be Paid with Plan Assets||May Not be Paid with Plan Assets|
|Correction of Plan Errors (including qualification failures, delinquent 5500 filings, fiduciary violations)||X|
|Custody of Assets||X|
|Legal Services for Plan Fiduciaries||X|
|Participant Disbursements (distributions, loans, QDROs)||X|
|Plan Audit by Independent CPA||X|
|Plan Amendment, Discretionary||X|
|Plan Amendment, Required||X|
|Plan Termination: Consulting & Documents (resolution and amendments), including legal and actuarial fees||X|
|Plan Termination: Implementation||X|
|Preparation of Form 5500||X|
|Product or Contract Termination Charges||X|
|Plan Recordkeeping/Trust Accounting||X|
The general principles described above apply to both defined contribution (401(k), profit sharing, etc.) and defined benefit (traditional or cash balance) plans. That said, since assets in defined benefit plans are designated to pay employee benefits, unless there is a surplus funding, employer will have to make an additional contribution to bring assets back to the level enough to pay accrued benefits. Thus, unlike in a defined contribution plan where there may be an economic benefit of cost-sharing to plan sponsor, in a defined benefit plan it may be more of a postponement.
* See Department of Labor’s web page “Guidance on Settlor v. Plan Expenses“- https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/guidance-on-settlor-v-plan-expenses .
- Department of Labor (DOL) Booklet “A Look At 401(k) Plan Fees” September 2019
- DOL Advisory Opinion. 97−03A, Jan. 23, 1997
- DOL Information Letter to Henderson, July 28, 1998
- DOL Advisory Opinion 2001-01A, January 18, 2001
- DOL Field Assistance Bulletin 2003-3, May 19, 2003
- DOL Advisory Opinion 2007-07A, December 21, 2007
- DOL Field Assistance Bulletin 2012-01 April 2, 2012
- 29 C.F.R. § 2520.102-3(l)
- 29 C.F.R. § 2550.408b-2; Fee Disclosure Form
- EBSA Q&A 15, 2009 Enrolled Actuaries Annual Meeting
- DOL/PWBA Letter to Maldonado, March 2, 1987
- PBGC Advisory Letter 74-10
- PBGC Opinion Letter 94-6, September 28, 1994
The content of this post is for general information only and is believed to be accurate and reliable as of posting date but may be subject to change.
For discussion purposes only and in no way represents legal or tax advice. For advice regarding your specific circumstances, the services of an appropriate legal or tax advisor should be sought.