Don’t Like Paying for Your 401(k) Plan Audit? Here’s an Alternative

Michael L. Cecere, CPA, MST
Gray, Gray & Gray, LLP Certified Public Accountants

Companies set up a 401(k) plan for their employees for many reasons. As a vehicle that can help supplement social security income for their employees’ retirement years, a 401(k) is an important recruiting and retention tool and an excellent alternative to a traditional, company-funded pension plan. Plus, it can be rewarding to know that you are offering this support to your hard working employees.

The company, as the plan sponsor, can incur significant expenses in establishing and maintaining a 401(k) plan. Initial set-up costs are followed by expenses for record keeping and plan administration, all on top of any employer and/or profit sharing match. If the company is lucky enough to be growing and reach 100 or more employees, an additional plan expense comes into play: an annual plan audit. For some plan sponsors this is where the cost of a 401(k) plan can become a burden.

There is a way to avoid paying for an annual 401(k) audit, or other benefit plan expenses for that matter. It is perfectly legal and actually demonstrates that the plan’s fiduciaries (company officials) are taking their duties seriously.

The alternative goes by many names including ERISA account, ERISA Budget account or Revenue Sharing account. Regardless of the title you give it, this alternative can work for many companies.

What is it and how does it work?
An ERISA Budget account is a simple way to capture excess revenue above and beyond what is needed for actual plan administration and record keeping.

Almost all 401(k) plans participate in various investment vehicles. These investment vehicles are not self-sufficient and charge fees to satisfy their overhead costs for management of the investments. Usually, these fees are a fixed percentage of the amount of assets being managed. As the plan assets grow, so do the fees.
However, plan record keeping costs are usually based on the number of participants in the plan, not on the amount of plan assets. Even so, plan record keepers often receive payments that are based on a percentage of plan assets, creating an inherent disparity between how costs and revenues are determined. As the plan assets grow, overpayment for these services grows as well.

Here is an example: A new plan is established and accumulates $10 million in total assets. The management fee amounts to 25 basis points, or $25,000 annually. Assuming the company grows, hires more employees who join the plan and the plan assets grow to $25 million, the 25 basis points would now represent $62,500 in expenses. It would be reasonable to assume the underlying costs would not increase in this same proportion.

It is easy to see that the fee percentage charged has more than satisfied the related investment expenses, leaving a balance available to be put aside to pay other plan expenses or be allocated back to the participants. Regardless of how this excess is used, it is helping the fiduciaries satisfy their responsibilities.

The ERISA Budget “account” is where excess revenue sharing dollars from the investment products used by your plan are deposited. The account can be tapped by the plan sponsor to pay for eligible plan operating expenses including:

  • Communications and education costs
  • Adviser fees
  • Nondiscrimination testing
  • Plan audits

What Can’t Be Paid?
ERISA Budget accounts are not specifically mentioned anywhere in ERISA. However, ERISA does provide some relevant guidance with regard to what cannot be paid with the excess funds, so-called “settlor expenses.” Examples include:

  • Costs associated with establishing, designing, and terminating plans
  • Costs for the benefit of the employer, not the plan

It is Your Duty
One of the main goals of the Department of Labor (DOL), which oversees employee benefit plans, is to have plan sponsors and participants know what fees, both direct and indirect, the plan is incurring. A plan sponsor has a fiduciary duty to ensure their plan is paying reasonable fees.

An ERISA Budget account helps to accomplish this. Interestingly, the ERISA Budget account can actually be viewed as proof of overpayment because there would only be a need for such an account if the plan is, in fact, being overcharged. Some have suggested it is analogous to receive an income tax refund. Taxpayers forget that the reason they are receiving a refund is that they have overpaid their taxes in the first place.

Is it Right for Your Plan?
An ERISA Budget account can be the right choice for your plan but like anything, you need to perform your due diligence to determine if it is the right move for your company and your plan. Based on the example above, you can see that an ERISA Budget account works best with plans that have large and/or growing amounts of plan assets.

It is well worth the effort to discuss the possibility of establishing an ERISA Budget account with your accounting firm. For additional information or guidance, please contact Gray, Gray & Gray’s offices at (781) 407-0300.

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