Can a Plan Sponsor Waive Account Fees for Small Accounts?

Q: I work with an ERISA 403(b) plan in which we assess recordkeeping fees in the form of a flat dollar amount each year for each participant account. Such fees can slow the account growth of those just starting out on their retirement journey, as smaller account balances can have fees that exceed investment returns. Can we waive the fee for small accounts (e.g., $1,000 or less)?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Though the Department of Labor has not specifically addressed this issue, they have issued general guidance on this topic. 

The DOL has stated that when allocating expenses among all plan participants, the starting point is a review of the instruments governing the plan. Since ERISA does not specifically address the allocation of expenses in defined contribution plans, a plan sponsor has considerable discretion in determining the method of expense allocation. So when a method of allocating expenses is set forth in the plan documents, fiduciaries, consistent with their duty to follow the terms of the plan, will generally be required to follow the prescribed method of allocation. However, when the plan documents are silent or ambiguous, fiduciaries must select the method or methods for allocating plan expenses.

When allocating expenses among participants, the DOL explained that prudence would, “at a minimum, require a process by which the fiduciary weighs the competing interests of various classes of the plan’s participants and the effects of various allocation methods on those interests” and “a fiduciary’s decision must satisfy the ‘solely in the interest of participants’ standard.”

However, the DOL helpfully explained that a method of allocating expenses would not fail to be “solely in the interest of participants” if it disadvantages one class of participants, as long as a rational basis exists for the selected method.

The DOL has indicated that terminated employees who are plan participants can be charged recordkeeping fees, regardless of whether active employees are charged such fees. Thus, it would appear that waiving recordkeeping fees for small balance accounts would be permissible plan sponsor discretion, though you should confirm that you can do this in your specific circumstances with outside ERISA counsel.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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