Step 3. Charge only necessary administrative expenses to the plan fund.
Expenses charged to a pension fund must be for services necessary for the proper administration of the plan. This means that while a service may be administrative, it is not always appropriate for the plan to bear its expense in every instance. For example, calculating pension credit splits for a divorcing plan member is unquestionably an administrator function. However, charging the plan for that work every time a member asks for a recalculation while negotiating a divorce would not necessarily be an appropriate use of plan funds.
Interestingly, the U.S. Department of Labor suggests that an employer must satisfy a “but for” test by showing that it would not have incurred an expense had it not provided the services to the pension plan. To meet this requirement, an American employer looking to charge some or all of an employee’s salary to the plan fund, for example, must show that it would either eliminate the employee’s position entirely or reduce the employee’s compensation if the employer decided not to provide services to the plan. Put another way, a U.S. employer is prohibited from charging its in-house expenses to the plan if it is likely that the employer would continue to pay the employee the same salary and the employee’s non-administrative duties would simply expand to fill the workday if the plan administration work was outsourced.
Step 4. Make sure the amount charged to the plan is reasonable.
Determining whether a particular expense is reasonable is not always straightforward. To take an extreme example, although investment management fees are generally considered administrative in nature, high fees incurred in relatively sophisticated investment management strategies might not be reasonable when the size of a plan’s assets does not necessitate such a sophisticated investment management strategy.
In the in-house context, affixing a reasonable dollar amount to certain services could be difficult in some situations. Perhaps an appropriate benchmark for what is reasonable is the cost of the administrative task had it been performed externally. For instance, if a plan sponsor is charging the pension fund for the preparation of benefit statements and that service could be performed by an outside firm for a portion of the cost incurred by the sponsor, it would be unreasonable to charge the sponsor’s full cost to the plan. Obviously, it would also be unreasonable for a plan sponsor to charge a plan more than it actually incurred for the service.
Step 5. Document the payment of administrative expenses.
Plan sponsors should expect members to hold them accountable for each dollar that is charged to the pension fund. Thus, it is incumbent on plan sponsors to properly document not only the type and cost of the service charged to the fund but also the decision-making process justifying the use of in-house resources as opposed to a third party. This may include keeping detailed employee time sheets, logging all appropriate photocopies and printing expenses, and gathering information on the cost of third-party providers.
It is critical for plan sponsors to establish appropriate methods to keep track of the expenses charged to the fund, and their records will need to be meticulous. It might also be prudent for sponsors to develop a plan expense policy detailing how these expenses are to be recorded and tracked. While members may challenge sponsors when they believe improper expenses have been charged to the pension fund, putting appropriate systems in place and maintaining proper records should help protect the plan sponsor.
Among the many principles enunciated in the Kerry case is the determination that paying in-house expenses incurred in the administration of a pension plan should be no different than paying a third-party provider for the same service. In theory, it should not matter to whom plan funds are paid. However, the dynamic of sponsors recouping costs from their pension plans is awkward at best and also potentially volatile—especially when a plan stands in deficit and the sponsor invokes the deficit as a rationale for refusing benefit improvements.
Unless regulators step in and draft clear policies on which in-house expenses may be charged to a plan or the matter is resolved by legislation, it will be up to plan sponsors to fine-tune the Supreme Court’s pronouncement and take the necessary steps to protect themselves against potential claims.
Andrea Boctor and Angela Waite are associates with Stikeman Elliott LLP.
aboctor@stikeman.com
awaite@stikeman.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the October 2009 edition of BENEFITS CANADA magazine.