ERISA says that plan assets may be used only to pay benefits or to defray "reasonable expenses of administering the plan." The use of plan assets for any other purpose may be a breach of fiduciary duty, and perhaps also a prohibited transaction. In this last year, the Department of Labor has conducted a large number of audits to determine whether fees paid by Plans to outside service providers were improper, either because the services benefited the employer or a different plan, or because the fees were unreasonably large relative to the value of services performed.

• Targeted companies were located primarily in the Midwest region;
• Audits were considered ‘limited scope’ focusing exclusively on the use of plan assets to pay service providers fees;
• Pension plans appeared to be the main target;
• DOL requested fee invoices going back as many as five or six years;
• DOL expected to see a detailed description of the nature of services performed;
• If details were not included in the invoices, service providers were asked to furnish the required information;
• Absent sufficient detail, the DOL takes the position that the fiduciary has failed to satisfy its burden of showing that the expense was a legitimate plan expense.

DOL auditors have been taking an aggressive stance regarding the types of expenses that are considered to benefit the employer. In the DOL’s view, the employer must pay at least a portion of the cost incurred if the service provides any value to the employer (including, for example, the "PR value" attributable to improved employee relations). This means that many administrative expenses are considered shared expenses, and that an independent fiduciary must determine the employer’s share.

DOL auditors are citing a 1997 advisory opinion letter issued by DOL’s national office to a state insurance commissioner. That letter involved the expenses incurred to obtain an IRS determination letter upon termination of a pension plan sponsored by a defunct insurance company. The DOL stated that the expense should be shared by the employer and the plan if both parties have something to gain from the plan’s tax-qualified status. Additionally, an independent fiduciary should determine each party’s share if the employer has conflicting loyalties.

Types of expenses challenged

• Plan qualification expenses
• Benefit calculations
• Participant communications
• Merger and acquisition expenses
• Outsourcing of benefits administration
• Amount of expense
• Allocation of expense among plans

The results

• Generally, the agency will propose a 50/50 split, but, in some cases, the employer may be able to demonstrate that its share should be much smaller.
• Generally, employers that reimburse the plan can avoid the 20% penalty that ordinarily applies to cases involving breaches of fiduciary duty (see ERISA section 502(l)). This is achieved by having the employer make the reimbursement without officially reaching a "settlement" with the DOL. However, some prohibited transaction excise taxes may apply.
• Because of the increased audit activity, employers and other fiduciaries may want to review their procedures regarding the payment of fees from plan assets.