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Compliance Corner
November 2014

Prohibition On Charging Individualís Account For QDRO Expenses Is Reversed By DOL; Distribution Fees May Also Be Charged To Accounts
In a complete reversal of its prior opinion, the DOL’s Employee Benefits Security Administration (EBSA) has determined that a retirement plan may lawfully charge directly to the affected participant’s account the plan’s expenses associated with the participant’s QDRO (Field Assistance Bulletin 2003-3, May 19, 2003). FAB 2003-3 supersedes Advisory Opinion 94-32A which expressly prohibited that practice. The DOL’s previous opinion had proved troublesome to plan sponsors and seemed unfair to other participants, especially in a small plan where a particularly difficult QDRO review could result in major expenses to the plan, and those expenses were required to be borne proportionately by all participants. For a link to this FAB 2003-03, please click "http://www.dol.gov/ebsa/regs/fab_2003-3.html" .

FAB 2003-3 also holds that a plan may lawfully charge a participant’s account for the expenses of the participant’s distribution. This practice, too, had been considered illegal, because of the analysis and conclusion in Adv.Op. 94-32A.

Field Assistance Bulletin 2003-3. In the new FAB, the DOL discusses both generally and specifically ERISA’s rules that govern the allocation of plan expenses among participants in a defined contribution plan. After observing that ERISA is silent on this issue, the FAB notes that the controlling principle is the fiduciaries’ obligation to discharge their duties solely in the interests of the plan participants and in accordance with the governing plan documents. DOL states that it may be appropriate, with respect to certain plan expenses, to allocate those expenses among participants in proportion to their account balances. In other cases, the allocation could be per capita. The point is, according to DOL, that the plan fiduciaries have considerable discretion in this regard as they design and administer the plan.

Then, in developing a separate but related issue, the FAB discusses the propriety of charging certain fees solely to the account of the participant to which those expenses relate, such as fees for distributions, and for expenses incurred to determine whether a domestic relations order is qualified (i.e., qualifies as a “Qualified Domestic Relations Order” or QDRO). These areas are where the DOL’s departure from its prior published view is most pronounced. According to the new FAB, both of these practices are now permissible, and Adv.Op. 94-32A is superseded.

In short, DOL simply has changed its mind.

Standards and Principles for Allocation of Fees. The new DOL expense allocation philosophy will be warmly received by certain plan sponsors and administrators who perceived inequities under the DOL’s prior position. Still, DOL has set forth standards which, while more flexible, nevertheless must be met before a plan is permitted to charge the participant’s account for a particular expense.

The new FAB outlines these standards and comments on some specific expense allocation issues:

  • First and foremost, the expenses under consideration must be proper plan expenses (as opposed to settlor expenses that should be paid by the plan sponsor), and the amount of the expense must be reasonable. The FAB requires these assumptions as the very premise of the further discussion of how these expenses then can be allocated among the plan participants.

  • Before a plan pays even proper plan expenses, it must be determined that the governing plan documents permit it. Many boilerplate plan and trust provisions provide that the plan will pay certain expenses if the sponsor does not, and that should be fine. Other plan documents are silent on the issue, and it would be inappropriate for such a plan to pay even routine plan expenses without amending the enabling language into the plan. ERISA requires that plan officials follow the plan’s documentation in discharging their fiduciary duties.

  • The new FAB only obliquely addresses the rationale to be used in determining whether a particular plan expense should be allocated pro rata (in proportion to account balances) or per capita. The controlling principle here, as always, is to remember that such allocation is a fiduciary process. The FAB does discuss certain expense types that typically would be better allocated pro rata, such as investment management fees. By contrast, other fixed expenses, such as participant recordkeeping and annual reporting might be properly allocated per capita. And, proper fiduciary exercise does not automatically preclude the expenses from being allocated under a method that favors one class of participants over another, although the FAB cautions us to be mindful of tax qualification ramifications. (The DOL here is undoubtedly aware that a per capita allocation (as opposed to a pro rata allocation) would often penalize participants with smaller account balances, who tend to be nonhighly compensated employees.) Without using the exact term, the FAB appears to preach a “facts and circumstances” standard here, but DOL styles the issue strictly as a fiduciary one. Although phrased differently, those rules correspond in meaning, at least in this instance.

  • QDRO expenses may now be charged solely to the account of the affected participant (as opposed to being charged as an expense borne by the plan as a whole). Whether to its blame or to its praise, the DOL has served up a surprise here that totally reverses its view in Adv.Op. 94-32A. The employee benefits community will embrace this aspect of the FAB as a genuinely favorable development. (Plans are not required to allocate a participant’s QDRO expense solely to the participant’s account; but if the fiduciaries decide to do so, now they may.) DOL makes this switch in interpretation without a decent explanation. DOL offers no new jurisprudence; there has been no amendment to ERISA or the related regulations, nor have any court cases required the new DOL view. DOL merely suggests that it has garnered more experience in understanding the issue because of its longer history of investigations. DOL simply states:

    “ On the basis of this review, the Department has determined that neither the analyses or conclusions set forth in that opinion [Adv.Op. 94-32A] are legally compelled by the language of the statute.”
  • And, routine benefit distribution expenses, and expenses associated with the calculation of different benefit option amounts, now may be charged directly to the participant’s account.

  • The accounts of terminated vested participants may be charged for plan administrative expenses regardless of whether active participants’ accounts are so charged.

  • The new FAB notes that, pursuant to existing regulations, a plan’s summary plan description (SPD) must include a summary of any plan provisions that may result in the participant’s account suffering a fee or charge. Although the FAB states that that rule is to ensure that participants “are apprised of fees and charges that may affect their benefit entitlements”, it is unlikely that the DOL really means that the precise dollar amount of those charges must be spelled out in the SPD. The regulations cited by DOL in the FAB require that the SPD summarize the plan provisions that result in charges to the participant’s account, not that the SPD list the precise dollar charges (which, for example with respect to a QDRO review, would be impossible to discern in advance).
Comment and Caution. It is unlikely that the DOL’s new posture on fee allocations for defined contribution plans will result in masses of plans flocking to the outer limits of reasonableness as they consider passing along expenses to the appropriate participants. Nonetheless, in the right circumstances, some plan sponsors will find long overdue comfort in knowing that certain legitimate plan expenses can be allocated where they truly belong.

At the same time, however, an overly aggressive plan may still be vulnerable to legal attack if it attempts to saddle the affected participants with too much of the expense burden. This would be mostly true for a large plan with many distributions, because the DOL’s reversal of position seems to lack hard legal rationale. Conceivably, a large class of plan participants could sue to prevent the plan from charging participants in the fashion now permitted by DOL. The DOL’s new FAB does not enjoy the status of regulation or law, and complaining participants would not be bound by it. Indeed, while the courts often strive to (and sometimes must) give deference to the legal position of a governmental agency that is charged with the administration or enforcement of a particular statutory scheme, that deference is hardly boundless. And, here, the prior interpretation by DOL, as expressed in Adv.Op. 94-32A, was based on that opinion’s analysis of certain legal principles. None of the legal backdrop for those principles has changed (i.e., ERISA has not been amended in that respect), and the new FAB is completely silent about the reasons that called for DOL to opine in the opposite direction in the original opinion. (E.g., Adv.Op. 94-32A clearly states, after citing unambiguous statutory language, that a plan may not encumber the exercise of a statutory right, and the imposition of direct charges in these cases does just that.) The statutory citations in Adv.Op. 94-32A are unchanged, and the new FAB offers absolutely no reason for now adopting a new legal litmus test. The FAB, by its own admission, merely reflects a change of heart by DOL. Therefore, a court could easily conclude that DOL was right the first time, and rule in favor of the complaining participants. (Interestingly, the same person at DOL, occupying the same office on both occasions, authored both Adv.Op. 94-32A and the newer FAB 2003-3 some nine years later.) Might DOL change its mind again?

However, as a very practical matter, this “sea change” of opinion as announced here in FAB 2003-3 can comfortably be relied upon by the typical plan sponsor because the DOL’s investigative staff have been ordered to follow the new, more favorable rule.

© 2003 Paul Kelly, Attorney at Law
1801 Century Park East, Suite 2400
Los Angeles, California 90067
Tel: (310) 553-3060
e-mail: pkellyesquire@netscape.net

(Posted with permission granted to National Retirement Services, Inc.)
 
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