On May 19, 2003, the Employee Benefits Security Administration (formerly the PWBA, a division of the U.S. Department of Labor) issued Field Assistance Bulletin 2003-3 regarding the allocation of expenses in a defined contribution plan.  The Field Assistance Bulletin has no direct (and little, if any, indirect) relevance to welfare benefit plans or defined benefit plans.

    You can find the Field Assistance Bulletin 2003-3 at  www.dol.gov/ebsa/regs/fab_2003-3.html

    The EBSA issued this FAB in response to various requests for guidance from the National and Regional Offices.  The FAB addresses two principle issues regarding allocation of plan expenses in a defined contribution plan.

  • The first issue is what plan expenses are required to be allocated on a pro rata, rather than per capita, basis.
  • The second issue is whether plan expenses can be allocated to individual participants, rather than plan participants as a whole.

    Pro Rata or Per Capita. In the FAB,  the EBSA expresses its conclusion that plan sponsors and fiduciaries have considerable discretion in determining how plan expenses will be allocated among participants and beneficiaries.  The plan sponsor acting in a settlor capacity may adopt plan language selecting the allocation method for allocating expenses.  When a plan document is silent on the issue of allocation of expenses, however, the plan fiduciary must prudently select an allocation method.  A plan fiduciary must weigh the competing interests of various classes of the plan’s participants and the effects of the different allocation methods on those interests.  The FAB says that the pro rata method (i.e., allocations made on the basis of assets in the individual account) of allocating expenses among individual accounts would in most cases be an equitable method of allocation of expenses among participants.  However, it is not the only permissible method of allocation of expenses among participants.  Another method of allocating expenses is the per capita method (i.e., expenses charged equally to each account, without regard to the amount of assets in the individual account). The FAB says that the per capita method may be a reasonable method of allocation on certain fixed expenses such as recordkeeping, legal, auditing, annual reporting claims processing and similar administrative expenses; however, where fees or charges are determined on the basis of account balances, such as investment management fees, a pro rata method of allocating such expenses may be the prudent method.  In addition, the FAB states that  the fiduciary making the decision must not be impermissibly affected by personal self-interest.

    Individual Account vs. All Accounts. The second principle the FAB addresses is the allocation of expenses to an individual participant’s account as opposed to allocation of the expense to all participants.  The EBSA has expressly reversed its view as previously stated in Advisory Opinion 94-32A.  The EBSA now takes the position that a plan fiduciary may allocate reasonable expenses of determining whether a domestic relations order is a qualified domestic relations order (“QDRO”) to the individual participant’s account rather then to all participants.

    In addition to the QDRO example, the FAB provides the following examples in which allocation to an individual participant’s account is appropriate:

  1. Hardship Withdrawals.  A plan may charge the administrative expenses in administering a hardship withdrawal distribution to the account of the individual requesting the withdrawal.
  2. Calculation of Benefits Payable under Different Plan Distribution Options.  A plan may charge the expenses of calculating the benefits payable under the different distribution options available under the plan to the account of the individual participant requesting the calculations. 
  3. Benefit Distributions.  A plan may charge administrative expenses associated with making periodic distributions (e.g., a monthly check writing fee) to the account of the individual participant receiving the periodic distribution.
  4. Accounts of Separated Vested Participants.  Even if the plan sponsor generally pays certain administrative expenses of the plan, those same administrative expenses can be charged to the accounts of individuals that have separated from employment.  These expenses can be charged without regard to whether the accounts of active employees are charged and without regard to whether the separated participant is entitled to a distribution.  The FAB addresses the fiduciary duties regarding allocation of expenses. However, the Internal Revenue Service has the authority to address the issues regarding “forcing out” individuals that have separated from employment.  A question remains whether allocating administrative expenses to individuals who have separated from employment differently than individuals who are still active is a violation of Code § 411(a)(11) or ERISA 203(e).

    SPD.  The FBA also stated that the Summary Plan Description must contain a summary of any provisions that may result in expenses being allocated to an individual participant’s account.  This requirement is intended to ensure that participants are aware of fees and charges that may affect their account balances.

    Plan Documents.  Plan sponsors may also want to consider whether the plan document should specify the method by which charges are allocated to participants’ accounts. 

If you have questions relating to the EBSA’s FAB, please contact the attorney you work with at Dorsey & Whitney LLP.  If you are a Dorsey & Whitney LLP client who does not regularly work with an employee benefit attorney at Dorsey & Whitney LLP, you can also call Mike Punt, the Employee Benefits Department’s Communications Coordinator, at 612-340-2867 to be connected to an Employee Benefits attorney.