The Department of Labor (DOL) divides 401(k) fees into two categories – administrative fees that can be paid from plan assets, and settlor fees that can't. It’s up to the 401(k) plan sponsor to decide whether to pay administrative fees from plan assets or a corporate bank account. If they choose plan assets, they have a fiduciary responsibility to allocate the fee among plan participants in an equitable manner.
This job is not difficult with some basic education. Field Assistance Bulletin No. 2003-03 (“FAB 2003-3”) outlines a framework for allocating 401(k) administrative fees. If you’re a business owner, you should understand its basics to best ensure your plan’s administrative fees are allocated equitably. Below are some highlights.
ERISA grants employers – and other 401(k) fiduciaries – considerable discretion in determining how to allocate 401(k) administrative fees among plan participants. The three most common allocation methods are:
- Pro rata – all plan participants pay the same percentage of assets. Under this method, a participant with a large account balance will pay a higher dollar amount than participants with smaller balances.
- Per capita – all plan participants pay the same amount, regardless of account balance. Under this method, a participant with a small account balance will pay a higher percentage than participants with larger balances.
- Per use – allocated (or charged) to an individual participant, not all participants.
Recognizing a lack of clear guidance, the Department of Labor (DOL) provided a framework for making fee allocation decisions in FAB 2003-3.
Check the plan document first!
By law, the day-to-day operation of all 401(k) plans must be governed by a written plan document. That said, if your plan document sets forth the method for allocating fees, FAB 2003-3 makes it clear you must follow it. Most plan documents only give general guidance. Below is an excerpt from the plan document used by Employee Fiduciary clients:
(d) Allocation of Expenses. The Plan Administrator may allocate all, none or any portion of the Plan's expenses to Participant Accounts. When allocating expenses among Participant Accounts, the Plan Administrator may allocate such expenses using any reasonable method that does not violate Title I of ERISA and does not discriminate in favor of Highly Compensated Employees within the meaning of applicable provisions of Code section 401(a)(4). Such methods may include, but not be limited to: (1) allocating expenses only to current or former Employees (or among any other classification(s) of Employees); (2) allocating expenses directly to individual Employees; (3) allocating expenses using the per capita or pro rata method; and (4) any combination of the foregoing.
Considerations when the plan document is silent
If your plan document is silent or ambiguous, you must act prudently and solely in the interests of participants when allocating administrative fees. FAB 2003-3 provides the following guidance:
A plan fiduciary must be prudent in the selection of the method of allocation. Prudence in such instances would, at a minimum, require a process by which the fiduciary weighs the competing interests of various classes of the plan's participants and the effects of various allocation methods on those interests. In addition to a deliberative process, a fiduciary's decision must satisfy the "solely in the interest of participants" standard. In this regard, a method of allocating expenses would not fail to be "solely in the interest of participants" merely because the selected method disfavors one class of participants, provided that a rational basis exists for the selected method.
Pro rata vs. per capita
Pro rata and per capita are the two most common methods for allocating general (plan-level) administrative expenses among plan participants. To help choose the most equitable method, FAB 2003-3 provides the following guidance:
- The pro rata method would appear to be an equitable approach for allocating most general (plan-level) administrative fees, but it’s not the only permissible method.
- The per capita method may also be reasonable for allocating certain fixed administrative fees related to record keeping, legal, auditing, annual reporting and claims processing.
- The per capita method would appear to be an arbitrary method for allocating fees determined on a plan assets basis, such as plan-level investment advice.
- The pro rata or per capita may be a justifiable method for allocating fees related to participant investment advice, without regard to the actual utilization of the service.
Allocating fees to individual participants
Certain administrative fees may be allocated to individual participants, rather than all participants. FAB 2003-3 provides the following examples:
- Hardship withdrawal fees – including expenses necessary to qualify the hardship
- Distribution fees
- Qualified Domestic Relations Order fees – including expenses necessary to qualify the domestic relations order and split the account.
- Participant loan fees
Need additional guidance? Ask your 401(k) provider!
To pay 401(k) administrative fees from plan assets, you must do two things as a business owner to protect the interests of plan participants and avoid fiduciary liability – 1) ensure the amount is “reasonable” and 2) allocate the amount equitably among plan participants. While the former can be tricky, the latter is usually straightforward due to FAB 2003-3 guidance.
Need further guidance? Ask your 401(k) provider. A qualified provider can help weigh your fee allocation options.