By Jessica Skinner, J.D.
It is a simple concept; plan expenses are either payable from the plan’s assets, or they are not. In practice, it can be much more difficult.
The Employee Retirement Income Security Act (ERISA) requires the plan fiduciary to evaluate all fees paid by the plan to ensure those expenses are related to a necessary fiduciary function. The kicker is, many expenses incurred by a plan are not related to a fiduciary function but are instead settlor in nature and are not permissible plan expenses. Expenses that fall outside of the fiduciary bucket must be paid for directly by the employer and may not come out, derive or originate from plan assets.The failure to pay an expense from the proper source can result in significant penalties and costs for a plan sponsor.
Settlor Functions vs. Fiduciary Functions
In plan sponsorship, one of the most difficult questions to address is, what is the difference between settlor and fiduciary functions. Settlor functions are those that relate to the employer’s business, such as the establishment, design or termination of a plan. All settlor decisions are made relative to the employer’s role as the settlor of the plan trust and are discretionary, meaning that they are not mandated by regulation or law, and generally benefit the employer as opposed to participants and beneficiaries.
As such, these expenses are the sole responsibility of the employer and cannot be paid for out of plan assets. In contrast, expenses that are fiduciary in
nature are those expenses that are incurred in the day-to-day operation of the plan. Fiduciary expenses are necessary for the administration and maintenance of
the plan and primarily benefit the employees. Expenses derived in this manner are allowable plan expenses.
The “Test(s)”
Unfortunately, the Department of Labor has issued only partial guidance in this area, and has arguably made the waters muddier. The decision of what side of the fence an expense falls is a fiduciary decision and will open the decision maker to ERISA’s fiduciary liability provisions.
The first question to ask yourself as the plan sponsor is, do the plan’s terms allow the payment of the expense, and if so, is it reasonable. By answering yes to these questions, the next step is to determine if the expense is related to a fiduciary or a settlor function. In making this determination, there are two primary questions to ask:
Grand Scheme of Things
In defined contribution plans, expenses paid out of plan assets directly affect the participants’ account because the expense is a charge against their account balances.
The evaluation of who should pay for an expense is an important fiduciary function and is becoming all the more transparent with the introduction of the new fee disclosure rules set to make their debut in the coming year. Knowing what expenses are permitted plan expenses and making sure all plan expenses fall on the fiduciary side of the fence is an important issue for plan fiduciaries to evaluate and apprise themselves of when hiring service providers.
It is a simple concept; plan expenses are either payable from the plan’s assets, or they are not. In practice, it can be much more difficult.
The Employee Retirement Income Security Act (ERISA) requires the plan fiduciary to evaluate all fees paid by the plan to ensure those expenses are related to a necessary fiduciary function. The kicker is, many expenses incurred by a plan are not related to a fiduciary function but are instead settlor in nature and are not permissible plan expenses. Expenses that fall outside of the fiduciary bucket must be paid for directly by the employer and may not come out, derive or originate from plan assets.The failure to pay an expense from the proper source can result in significant penalties and costs for a plan sponsor.
Settlor Functions vs. Fiduciary Functions
In plan sponsorship, one of the most difficult questions to address is, what is the difference between settlor and fiduciary functions. Settlor functions are those that relate to the employer’s business, such as the establishment, design or termination of a plan. All settlor decisions are made relative to the employer’s role as the settlor of the plan trust and are discretionary, meaning that they are not mandated by regulation or law, and generally benefit the employer as opposed to participants and beneficiaries.
As such, these expenses are the sole responsibility of the employer and cannot be paid for out of plan assets. In contrast, expenses that are fiduciary in
nature are those expenses that are incurred in the day-to-day operation of the plan. Fiduciary expenses are necessary for the administration and maintenance of
the plan and primarily benefit the employees. Expenses derived in this manner are allowable plan expenses.
The “Test(s)”
Unfortunately, the Department of Labor has issued only partial guidance in this area, and has arguably made the waters muddier. The decision of what side of the fence an expense falls is a fiduciary decision and will open the decision maker to ERISA’s fiduciary liability provisions.
The first question to ask yourself as the plan sponsor is, do the plan’s terms allow the payment of the expense, and if so, is it reasonable. By answering yes to these questions, the next step is to determine if the expense is related to a fiduciary or a settlor function. In making this determination, there are two primary questions to ask:
Grand Scheme of Things
In defined contribution plans, expenses paid out of plan assets directly affect the participants’ account because the expense is a charge against their account balances.
The evaluation of who should pay for an expense is an important fiduciary function and is becoming all the more transparent with the introduction of the new fee disclosure rules set to make their debut in the coming year. Knowing what expenses are permitted plan expenses and making sure all plan expenses fall on the fiduciary side of the fence is an important issue for plan fiduciaries to evaluate and apprise themselves of when hiring service providers.
