state of mind2

Class action law suits and Department of Labor enforcement initiatives have created a 401(k) fee state of mind for fiduciaries.

How much, who pays for them, and how they are paid are issues about which service providers offer guidance. @GregIacurci in his article, How Should Retirement Plans Pay Their 401(k) Fees? in Investment News (registration may be required) discusses how advisors can help plan sponsors allocate retirement plan fees.

That is, fees paid for by the plan which by participants. But not all fees are considered equal. Here’s a brief overview of what types can be paid and what shouldn’t.

Settlor vs. Plan Expenses

Plan assets can be used for two purposes: to pay benefits and pay the “reasonable” expenses of plan administration.

The decision to pay fees from the plan is a fiduciary decision subject to ERISA’s fiduciary rules. That is, the plan must be established and maintained by the employer for the “exclusive benefit” of the employees and beneficiaries.

That means that the plan cannot pay for expenses that are considered to be the responsibility of the employer. These are called “settlor” expenses and may include:

  • Legal or consulting services in connection with the formation of the plan
  • Plan design studies and cost projections to determine the financial impact of a plan change
  • Legal and consulting expenses incurred in connection with the decision to terminate a plan

On the other hand, expenses that relate to the fiduciary’s administration of the plan can be paid out of plan assets. These are called operational expenses and may include:

  • Drafting required plan amendments to maintain the tax-qualified status of the plan, e.g., Pension Protection Act restatement
  • Discrimination testing
  • Implementing a plan termination

It’s more complicated than this, of course. The Department of Labor has published Guidance on Settlor vs. Plan Expenses that provides a set of six hypothetical fact patterns in which various plan expense issues are both presented and addressed.


As with all things ERISA, there has to be proper documentation. Best practices would be to specifically state in the plan document that the plan may pay reasonable operating expenses, reflect that in the Summary Plan Description or Material Modification thereof, and have a written Expense Policy.

As you know, ERISA compliance matters are based on individual facts and circumstance, and especially when paying expenses from plan assets. So use caution when doing so including discussing it with your legal advisor.

Image: State of Mind by Vesa Härkönen via Flickr