Even with CARES Act and other relief, many companies are still experiencing financial stress and may wonder if they can transfer some of the costs of operating their retirement plan to participants. As is typical of regulatory questions, the answer is no for some and yes for others as long as certain requirements are satisfied.
Retirement plan expenses that can not be paid by the participant include so-called “settlor expenses.” These are the costs for services that provide a benefit to the plan sponsor, as opposed to plan participants, and generally relate to decisions regarding the amendment, establishment, or termination of a plan. A good example would be the cost for an evaluation of options to reduce the plan sponsor’s contributions to the plan. Sometimes the difference between settlor and other plan expenses is unclear so the Department of Labor (DOL) has published a set of fact patterns that may be helpful.
If the expenses that the sponsor wishes to shift are “settlor” expenses, then the next step is to check the plan documents for a definition of eligible expenses that can be paid by plan assets. This would be a good opportunity to make sure that these are the expenses actually being paid by the sponsor as a way to confirm that the plan documents align with how the plan has been operating. If the plan document does not expressly permit expenses to be paid by the plan, it can be amended to do so. The plan sponsor should also review the plan’s forfeiture account, which may also be used to pay certain plan expenses.
Once the sponsor identifies which retirement plan expenses can be paid for by the plan participants, s/he needs to decide how to allocate the expenses. The easiest option is a “per capita” option to simply divide the expense equally across all participants. For small plans, however, that method could quickly erode the balances for younger workers or participants with low balances. Another approach is “pro rata” where expenses are spread proportionately among participants based on account balances. This method may impact company owners the most since they often have the larger balances in the plan. Whatever approach you take should be disclosed to participants so that they can make informed decisions about their plan. A clearly worded, transparent communication can help soften the blow.
A company sponsored retirement plan is a valuable benefit, and while plan sponsors may need to reevaluate expenses in times like these, providing employees with a dependable way to save for retirement remains important. There are many aspects of a plan that can be assessed to make times of financial pressure a little more palatable, so be sure to reach out to your financial advisor or recordkeeper to explore options.