THE AMERICAN LAW INSTITUTE Continuing Legal Education

Transcription

1 1 THE AMERICAN LAW INSTITUTE Continuing Legal Education Pension, Profit-Sharing, Welfare and Other Compensation Plans October 17-19, 2012 Washington, D.C. Dealing with Plan Fees and Expenses; Auditing for Compliance By Pamela D. Perdue Summers, Compton & Wells, P.C. St. Louis, Missouri

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3 3 DEALING WITH PLAN FEES AND EXPENSES; AUDITING FOR COMPLIANCE By Pamela D. Perdue Summers, Compton & Wells, P.C. I. Introduction Both the Department of Labor (DOL) and the courts have an interest as to the appropriateness of, as well as the amount of fees and expenses being paid from retirement plans. The interest of each spans questions as to both the appropriateness of a specific category of expenses being paid from a plan as well as the amount and adequacy of prior disclosure. Obviously, to a certain extent, the issue as to required disclosure will be resolved by the implementation of the DOL s new fee disclosure regulations comprised of both the required disclosures from service providers to plan officials and the disclosures from plan officials to participants. However, this issue encompasses much more than just those specific fee disclosure requirements. When the DOL commences an investigation of a plan, items typically requested to be made available include documents and items that can disclose relevant information regarding the amount of expenses paid and to whom as well documents that can support or fail to support the authority for payment from the plan. The DOL has itself increased its activity in the area including requesting information during the course of investigations as to the types of shares made available under a plan (institutional or retail) as well as attempting to get a handle on the level of understanding by plan fiduciaries as to the fees paid by plans. Moreover, courts have also entered the fray with courts deciding such issues as whether the types of shares made available by a plan, whether the payment of revenue sharing and whether the failure to purchase the least expensive share class by a plan necessarily results in a fiduciary breach. While there is guidance both in terms of a general statutory provision as well as court cases, many questions regarding the payment of specific expenses still lack sufficient guidance. II. ERISA Statutory Requirements A. Generally The Employee Retirement Income Security Act of 1974 (ERISA) mandates several duties that a fiduciary must adhere to which bear directly upon the payment of expenses from a plan. First, among the affirmative duties required by ERISA is a requirement that the fiduciary discharge his/her duties in accordance with the plan document insofar as the document is 1

4 4 consistent with ERISA. [ERISA '404(a)(1)(D)] Moreover, ERISA prohibits the assets of a plan from inuring to the benefit of any employer but rather, must be held for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. [ERISA '404(a)(1)(A)] Further, ERISA Section 403(c)(1) provides, subject to certain exceptions not here relevant, that the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purpose or providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. In the context of the payment of fees and expenses from a plan, these duties boil down to a requirement that each of the following be present: 1. the payment must be authorized by the plan; 2. the payment must be in the interest of plan participants and beneficiaries, and 3. the amount to be paid from the plan must be reasonable. [DOL Advisory Opinion 97-03A, January 23, 1997] Failure to satisfy any of these requirements could result in the payment from the plan constituting a breach of fiduciary duty and/or a prohibited transaction under ERISA and/or under the Internal Revenue Code. (ACode@) B. Authorized by the Plan If the plan document either clearly authorizes the payment of administrative expenses from the plan or either expressly prohibits such payment, the answer to the first inquiry is clear. If the plan is silent as to the issue of whether administrative expenses may be paid from the plan, however, the DOL takes the view that the plan may nevertheless pay reasonable administrative expenses. This is because the plan's silence is not read to override the basic statutory right of a plan under ERISA to pay reasonable administrative expenses. [DOL Advisory Opinion 97-03A, January 23, 1997] If the plan prohibits the payment of expenses from the plan, but the plan sponsor has reserved the right to amend the plan, the plan sponsor could amend the plan to allow, prospectively, the payment of administrative costs from the plan. However, the DOL takes the view that the costs of that amendment could not be paid from the plan without running afoul of ERISA's selfdealing provisions under Section 406(b)(1). Specifically, in Advisory Opinion 97-03A, the DOL states that the prohibition on self-dealing would preclude an employer "from exercising fiduciary authority to use plan assets to pay for an amendment to the plan that acquits the employer of an 2

5 5 obligation to pay plan expenses." That is, even though most courts that have reviewed the issue, along with the DOL itself, have concluded that the amendment of a plan is a settlor function, the DOL takes the position that the determination as to whether to pay particular expenses out of plan assets is necessarily a fiduciary determination. As such, the costs involved in using that discretion to relieve the employer of future liability would not be costs properly payable from the plan. C. Expenses Must be Reasonable 1. Marketplace Determination Even if authorized or deemed authorized under the terms of the plan, an expense may only be paid from a plan to the extent that it is reasonable. When dealing with expenses arising from services performed by third parties, generally this determination is to made based upon a comparison of the costs to those otherwise available in the marketplace. What agents are directed by the DOL to do in this regard in the DOL s Enforcement Manual is to examine administrative expenses for categories that appear unreasonably costly in relation to other similar plans. 2. Hidden Fees It should be noted that when dealing with hidden fees, the fiduciary, in order to fulfill its obligations, must ferret out all such fees and compensation attributable to the provision of services to the plan in order to determine the reasonableness of the entire compensation package. 3. Float Specifically, the DOL states that when engaging the services of service providers, plan fiduciaries must engage in an objective process designed to elicit information necessary to assess the qualifications of the provider, the quality of services offered, and the reasonableness of the fees charged in light of the services provided. In circumstances where the service provider may receive compensation in the form of float, the DOL states that the selection and monitoring process engaged in by a responsible fiduciary should include: 1. a review of comparable providers and service arrangements (e.,g., quality and costs) to determine whether such providers may credit float to the provider=s own account, rather than the plan; 2. a review of the circumstances under which float may be earned by the service provider; for example, in the case of float on cash awaiting investment, fiduciaries should ensure that their service arrangements include time limits within which the provider will implement investment instructions following receipt of cash from the plan; fiduciaries should also understand that delays in the plan providing investment instruction or delays in implementing investment direction by the service provider would result in increased compensation in the form of float; in 3