Can you pay 401(k) plan expenses from plan assets?

Primary consideration—the nature of the 401(k) plan expense

Certain plan costs can be paid by the plan, the sponsor/employer, or the participant. The nature of the expense and the terms of your plan document determine who can pay a particular cost. 

Administrative plan expenses versus employer expenses

Under ERISA, plan assets can be used to cover reasonable administrative expenses related to:

• The plan’s administration and day-to-day operations
• The investment of plan assets and related services
• Services for the plan or its participants (e.g., website, call center, education meetings)

Plan assets can’t be used to pay employer costs, also known as settlor expenses. These are the costs an employer incurs when making decisions about the establishment, design, or termination of a plan. Settlor expenses also include costs for services that are strictly for the employer’s benefit. Here are some common administrative and settlor expenses to help you understand the difference.

You can find additional examples at "Guidance on Settlor v. Plan Expenses.”  

Individual participant fees

In addition to administrative fees, your plan providers may assess fees for individual participant services, such as loans and qualified domestic relations orders. Only participants who use these services will incur the fee, and it’s usually deducted directly from their 401(k) accounts.      

Investment-related fees

Your investment providers may charge management, distribution (12b-1), and other fees to cover a fund’s operating costs. These fees are referred to as the expense ratio, and they’re deducted directly from the investment’s total return. As such, they’re an indirect expense; you won’t receive a bill and participants won’t see the fees on their account statements. Some investments may also assess a sales charge or redemption fees. These are direct expenses that participants may incur when they buy or sell shares of that investment.

Developing your plan’s fee strategy

Although ERISA allows it, paying administrative expenses with plan assets may or may not be the best approach for your plan. It’s a fiduciary decision that only your retirement plan committee or other plan fiduciary can make after carefully evaluating:

• The reasonableness of expenses
• The appropriateness of using assets for permissible plan expenses
• The potential impact on participants’ retirement savings
• Whether certain participants would bear more of the cost than others
• Fee allocation methods (flat participant fee, percentage of plan assets, etc.)

Fiduciary discussions should include your ERISA counsel, financial professional, and third-party administrator. Why? Their professional advice can help ensure you develop a fair and equitable fee strategy that satisfies your fiduciary duties and complies with the terms of your plan document. Remember, the plan can’t pay administrative expenses if your document provides that the employer is responsible for the payment of all plan expenses. Check your plan document to make sure it permits the use of plan assets to pay for reasonable administrative expenses.  

Be fee savvy—know what you’re paying and how you’re paying it

The volume of fee lawsuits underscores the importance of understanding your overall plan cost broken down by expense type—administrative, participant, investment, and settlor. Equally important is making sure that:

• Plan fees are paid by the appropriate parties
• Only reasonable administrative fees are paid with plan assets
• A disciplined process is followed to create your fee strategy

Because when it comes to plan expenses and your fiduciary duty, ignorance is not bliss.