Employees Could Be Forced to Pay More for Their 401(k)s

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Employees Could Be Forced

To Pay More for Their 401(k)s

By KATHY CHU, DOW JONES NEWSWIRES

June 24, 2003

Employees may soon have to pay more out-of-pocket costs related to their retirement plans.

Recent guidance from the Department of Labor is expected to lead to more companies socking employees with expenses related to processing requests and calculating benefits under defined-contribution plans. These costs can run anywhere from a few dollars to hundreds of dollars, depending on the paperwork and resources involved.

The Employee Benefits Security Administration, a division of the Labor Department, said in mid-May that plan sponsors can pass along certain administrative costs to individual participants.

Granted, plan sponsors always knew they could pass along some costs, but what they didn't know is that they could do this on a per-participant basis, according to Mark Poerio, an attorney with Paul, Hastings, Janofsky & Walker LLP in Washington.

In general, plan sponsors aren't required to cover many of the costs of administering and maintaining defined-contribution plans such as 401(k)s, although they must bear the expense of creating the plan. As a result, some companies may have divvied up these costs among plan participants. But others have chosen to pay for expenses themselves, out of corporate profits.

But considering the still-shaky economy, more companies may be looking for ways to shift costs to employees.

The Labor Department's decision noted that the Employee Retirement Income Security Act, or ERISA, doesn't "preclude the allocation of reasonable expenses" to individual participants for items such as hardship withdrawals, calculation of benefits, distribution checks issued and forms processed to provide benefits for divorcing couples. ERISA is a federal law that sets standards for employee pension and health plans.

The guidance is a departure from the agency's previous determination in 1994 that expenses associated with a qualified domestic-relations order -- a legal document that permits the division of assets in divorce and for child support -- couldn't be charged specifically to the individual participant who initiated it.

When that determination was made, it created much confusion among plan sponsors and resulted in multiple requests for clarification of the issue. Because of the agency's 1994 ruling, companies interpreted this to mean they either had to pay for the qualified domestic-relations order expense, which could run from hundreds to thousands of dollars, or divvy up this expense among plan participants.

Because of the position that the Department of Labor "took with regard to QDROs, it raised questions about these other expenses [hardship and benefits distributions]," said Donald Myers, a partner at Reed Smith LLP law firm in Washington and the department's counsel for ERISA Regulation and Interpretation in the early 1980s.

That is partly why companies are welcoming the clarification. The decision is likely to result in more small-business owners -- who may be unable or unwilling to bear the costs of 401(k) administration -- offering defined-contribution plans since they can be confident in their ability to pass along expenses to participants, according to Ed Ferrigno, vice president of the Profit Sharing/401(k) Council of America.

But not everything in the Labor Department's ruling is so clear-cut.

The agency determined that companies can now charge plan expenses to those employees who have left a company yet are still vested in the 401(k), even if those same expenses aren't charged to participants still at the company. However, Section 411 of the Internal Revenue Service code prohibits a plan from imposing a "significant detriment" on participants who choose not to take an immediate distribution from their account when they terminate employment. But it is unclear whether a company's imposition of expenses on employees who have left and not on current workers would constitute a significant detriment.

"We are aware of the issue that is out there, but we don't have any guidance at this point as it may relate to Code Section 411," said Don Roberts, an IRS spokesman.