Fees and Expenses: Charging Participant Accounts

By Fred Reish and Bruce Ashton

The rate of return on a participant's account balance is determined by both the earnings on the assets in the account and by the expenses which are charged to the account. Thus, a decision about charging an expense to an individual participant's account, rather than to the plan as a whole, is an important one.

To date, the Department of Labor has formally addressed this issue only once, in Advisory Opinion 94-32A. That opinion dealt with allocation of the expense in determining whether a court order is a qualified domestic relations order (QDRO). Even though the opinion is limited to this narrow issue, the DOL's analysis provides a framework for understanding how the DOL will view the allocation of other types of expenses.

The DOL distinguished between "rights mandated by Title I of ERISA" and other types of rights that a participant may have under the plan. Section 206 of ERISA requires the plan administrator to determine whether a domestic relations order (DRO) is a QDRO. Since the law requires this determination, it is a mandated right. With respect to such rights, the DOL concluded that it was not proper for a plan to "encumber" the exercise of such a right by imposing conditions on that exercise which are not specifically contemplated by ERISA. Finally, the DOL said that imposing a fee on a participant or the alternate payee for making this determination would be an "impermissible encumbrance." In short, the DOL concluded that the cost of determining whether a DRO is a QDRO cannot be allocated to the account of the participant who is getting divorced. And, the conclusion is the same regardless of whether the cost is charged to the participant or alternate payee directly or whether it is taken from the account of the participant or the alternate payee.

So, how would this analysis be applied in other situations? Consider participant loans or hardship withdrawals. Although these are rights which a participant may have under the plan, they are not mandated by ERISA, but may be included in the plan at the option of the plan sponsor. For convenience, let's label these "permissive" rights. The reasonable cost of permitting a participant to exercise these permissive rights, under the rationale of the Advisory Opinion, could be charged to the individual participant or to the participant's account.

What about distributions? The analysis here is more difficult. It would appear that certain plan activities, such as being enrolled in the plan, receiving a summary plan description, and receiving a distribution of benefits, are fundamental rights required by ERISA. Thus, it could be argued, the plan could not charge an individual participant for the cost of any of those activities, including the cost of making the distribution. On the other hand, many plans offer alternative forms of distribution in addition to the normal form. In such plans, arguably, receiving the normal form would be the only mandated right, so that the plan could allocate the reasonable cost of alternate forms of distribution to a participant's account.

We understand that the DOL will be formally addressing this question in the near future. Until the formal guidance is issued, we suggest that the conservative approach would be not to charge the participants for the cost of distributions.