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May 21, 2003
Prohibition On Charging Individual’s Account
For QDRO Expenses Is Reversed By DOL;
Distribution Fees May Also Be Charged To Accounts
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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.
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:
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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.
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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.
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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.
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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.
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The accounts of terminated vested participants may be charged for plan administrative expenses
regardless of whether active participants’ accounts
are so charged.
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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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