401(k) Fees - Administrative vs. Settlor Plan Expenses

As a business owner, you may be wondering what 401(k) fees you can pay from plan assets. This confusion is hardly surprising when you consider the broad range of fees a 401(k) plan can incur.

However, you have little choice but to know the correct answer due to your fiduciary responsibility to pay only “necessary” fees from plan assets. Otherwise, you risk paying fees that improperly reduce the investment returns of plan participants.  As a plan fiduciary, you could be held personally liable for restoring these losses.

The good news is that it’s easy to stay out of trouble. The Department of Labor (DOL) divides 401(k) fees into two categories – administrative expenses that are payable from plan assets, and settlor expenses that are not. Before you pay a 401(k) fee from plan assets, you just need to confirm the expense fits the proper category. Here’s a guide to what you need to know.

Administrative vs. Settlor Expenses

Administration Expenses: the DOL defines these as expenses that benefit participants exclusively, which includes plan administration and investment management

Settlor Expenses: these benefit the 401(k) plan sponsor in more than an incidental way. Common settlor expenses include consulting fees for professional guidance during the plan formation, design, or termination process.

Because all 401(k) paid from plan assets reduces the investment returns of plan participants, the DOL only allows the payment of fees that benefit participants to be paid from plan assets. For this reason, settlor fees must be paid by the plan sponsor. However, there are a few twists to this rule. When 401(k) plan participants are considered to derive some benefit from a settlor expense, the sponsor can charge that portion to the plan. Further, plan expenses necessary to implement a settlor decision can be paid from plan assets as an administrative expense.

Common 401(k) plan administrative and settlor expenses can be found below:

Plan Stage

Activity

Administrative Expense

Settlor Expense

Plan Formation

Plan setup – including participant account establishment and systems (trust, recordkeeping, billing) setup

x

 

Plan design consulting

 

x

Controlled group consulting

 

x

Provider search

 

x

Plan Management

Annual plan administration - including asset custody, participant recordkeeping, and ERISA compliance (Form 5500 preparation, nondiscrimination testing, participant disclosure)

x

 

Investment advice - including fund menu selection and professional portfolio management

x

 

Plan amendments (discretionary)

 

x

Plan amendments (legally-required)

x

 

Participant distributions

x

 

Participant loans

 x

 

QDRO splits

x

 

Enrollment meetings or participant education materials

x

 

Statement mailings

x

 

Investment fund adds, drops, replacements

x

 

Plan audit by independent CPA

x

 

Independent appraisal of hard-to-value assets or employer stock

x

 

Fidelity bond

x

 

Correction of plan qualification failures under the IRS' EPCRS program (SCP, VCP or Audit CAP) - including consulting fees, legal fees, and IRS penalties

 

x

Correction of late Form 5500 filings under the DOL’s DFVC Program - including consulting fees, legal fees, and DOL penalties

 

x

Correction of late deferrals and other fiduciary violations under the DOL’s VFC Program - including consulting fees, legal fees, and DOL penalties

 

x

Plan Termination

Legal and consulting expenses - e.g., drafting the resolution to terminate the plan

 

x

401(k) provider contract termination fees

x

 

Investment surrender charges

x

 

Unsure of a 401(k) Fee? Pay it from a Corporate Account

As a 401(k) plan sponsor, you have a fiduciary responsibility to only pay 401(k) fees from plan assets that are both “reasonable” and “necessary.” While it can be difficult to evaluate the reasonableness of 401(k) fees, it’s usually easy to evaluate their necessity - they just need to qualify as administration expenses.

However, not all 401(k) fees will fit cleanly into the administrative or settlor category. When this is the case, the safe course is not paying these fees from plan assets at all – instead, paying them from a corporate account.