Pension Trends   Volume V, No. 1, February 2004

In this issue...

Some Do’s and Don’ts About Paying Fees From Plan Assets

Independent Actuaries Turns 10!

Did you know that it is permissible to pay some fees associated with your retirement plan from plan assets? It is also true that other fees may not be paid out of plan assets without violating the exclusive benefit rule. Here are some general guidelines about what is and is not possible:

Both the Internal Revenue Service and the U.S. Department of Labor have jurisdiction about what fees can and cannot be paid from plan assets. Historically they have not always provided the same guidance, but a recent IRS ruling brings them into line.

The general rule is that fees associated with the maintenance of a plan may be paid from plan assets. Other fees, called settlor fees, such as the cost to set up the plan, are the responsibility of the plan sponsor. Settlor fees may not be paid from plan assets.

Maintenance fees include such items as the annual fee paid to the plan’s actuary or third party administer to cover such services as the actuarial valuation for a defined benefit plan, the annual allocations for a defined contribution plan, preparation of the Form 5500 filing, the audit of the plan and related annual administrative services.

Settlor fees include such items as the fee to design a new plan, and to prepare the initial plan document.

Some fees are not easily defined as maintenance or settlor fees. For example, the fee paid to an actuarial firm or third party administrator to assist with the termination of a plan often covers some services which qualify as maintenance fees (e.g., the fee to determine the amount payable to each participant upon plan termination; the fee to prepare the final Form 5500 filing) and other services which are settlor fees (e.g., fees to evaluate the whether to terminate the plan or consider other alternatives).

Regardless of whether a fee may be paid from plan assets, there are some planning ideas to keep in mind:

Before you pay any fees from plan assets, make sure your plan permits the payment of maintenance fees. Most plan documents do.

All fees typically associated with a retirement plan should be tax deductible to the plan sponsor under IRC §162 as ordinary and necessary business expenses. For a plan sponsor with taxable income, absent overriding reasons to the contrary, it makes more financial sense to pay the tax-deductible fees directly rather than use tax deferred plan assets.

Another reason why some 401(k) plan sponsors pay all or most of the fees associated with maintaining their 401(k) plan is employee perception. To be able to say to your employees “100% of every dollar you contribute to the plan goes to work for you” is a way to encourage more employees to participate in the plan.

Recent IRS and DOL rulings make it clear that it is possible to charge a higher fee to terminated participants who have not taken a distribution of their vested interests. Charging such a fee may encourage these ex-employees to take a distribution and thereby reduce the cost and liability associated with maintaining their accounts.

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Independent Actuaries Turns 10!

Independent Actuaries, Inc. is celebrating its 10 year anniversary this February. In February 1994 the present owner-employees purchased the defined benefit unit of SPS Consulting from the Union Bank of California. IAI started with a dynamic staff of 5 actuaries and consultants. In recent years that number has grown to 9 plus 3 actuarial analysts which led to our recent move to larger offices. These are just a couple of the signs that Independent Actuaries is a growing, thriving company that strives to produce excellent, easily understood analysis for our clients. If you would like to contact one of our actuaries or consultants to talk about setting up a defined benefit plan, please call 503-520-0848.

Pension Trends, Volume V, No. 1, February 2004
Copyright © 2004 Independent Actuaries, Inc.