When retirement plan sponsors perform administrative services on behalf of the plan, they can be reimbursed by the plan for those services. However, meticulous expense documentation is essential, as a recent case illustrates.
For a plan sponsor to receive reimbursement for services it has rendered to the plan, the sponsor must satisfy ERISA regulations. This means that the transaction must:
Satisfy the standards for a “prohibited transactions” exemption. The basic ERISA prohibited transaction that must be avoided is “self-dealing.”
Meet ERISA’s prudence standards for plan fiduciaries. Regulations allow a fiduciary like the plan sponsor to be reimbursed for “direct expenses properly and actually incurred in the performance of such services.” They also must be “reasonable.”
Fiduciary standards are applicable to just about any substantive actions a plan sponsor can take with respect to a plan, except “settlor” tasks, such as changing the level of employer contributions to participant accounts, amending the plan document, or even terminating the plan.
What these standards mean is defined by courts when disputes arise. In Perez v. City National Corporation, the U.S. Department of Labor argued — and a court agreed — that City National’s reimbursement for services rendered to its ERISA plan didn’t provide sufficient documentation. Its calculation of “direct expenses” was based on averages and estimates.
That methodology, the court concluded, could have resulted in over- or undercharges to the plan. Instead, the court ruled, the company should have “kept contemporaneous time records [such as timesheets] so that it could calculate actual costs” of its administrative services to the plan.
Even when expenses are meticulously documented, they must be reasonable. But how is reasonableness determined? Generally, courts decide reasonableness on a case-by-case basis.
To avoid discrepancies and meet your fiduciary burden, be sure to properly document any expenses you intend to seek reimbursement for from the plan, and review any fees you charge to the plan for reasonableness.