Most of the larger defined contribution (DC) plan fees are paid out of plan assets but not all plans have an ERISA account to pay eligible plan expenses as they arise. These accounts can be very useful to not only defray costs but also allow plan sponsors to get creative to help employees improve outcomes even if they don’t have the money to pay the expenses themselves. So what are ERISA accounts and what can be paid out of them?
A Chicago based CPA provides a brief explanation. An ERISA account or budgets generally are funded through excess revenue sharing. Within expense ratios of some mutual funds, there are extra fees above and beyond the cost of managing the money to pay administrative fees to record keepers, TPAs and advisors. Sometimes, there are excess fees that can be used to fund an ERISA budget – money from forfeiture accounts may also be used.
But only plan eligible expenses may be paid out the ERISA budget which includes services such as:
- Accounting
- Audits
- Legal
- Advice
- Education
Not allowed are costs to terminate plans or to pay for corrective actions. Vanguard also provides some good guidance as does an ERISA attorney who cautions about the pitfalls of using an ERISA account.
So should plans create an ERISA budget? If the company would like to provide services to employees to help them improve retirement readiness like advice, education or even financial wellness, or even other allowable administrative expenses, but does not have the money to pay for them, having money in an ERISA budget can be very convenient. But remember, regardless of whether the fees paid out of an ERISA budget are allowable, the overall fees of the plan have to be reasonable as determined through annual benchmarking exercises and full RFPs every three to five years.
