Retirement Plan Correction Solution
Lassoing Fee Changes

By: Ilene H. Ferenczy, Esq.

Ted the TPA is watching his costs go up and up with inflation.  After examining his financials and thinking it through, he finds he has to put aside his usual optimism and raise his fees.  It’s the first time he’s done this in years, and he is not really sure what to do and how it needs to be done.

He calls his attorney, Rebecca, who scoffs at him for waiting so long to raise fees.  “Are you doing this work just because you are a fan of ERISA or are you trying to make money, Ted?” she asks.  Then, she gets down to business and lets him know what he needs to do.

ERISA Regulations require you to let your clients know your fees in advance.

Part of the 2012 changes that gave us the so-called 408(b)(2) disclosure requires that a service provider to a plan must disclose its fees “a reasonable time” before contracting for services, and again at renewal or extension of the contract.  “A reasonable time” in this instance means 60 days in advance.  If your service agreement is “evergreen” – that is, it has no expiration date but only terminates when the parties take action to do so – there is no renewal or extension.  In that case, once fees are disclosed, no new notice is required unless the fees are changed.

“Ted,” Rebecca tells him, “if you change your fees, you need to send a new disclosure to your plan sponsors and fiduciaries, letting them know your new fee schedule.  So, do a nice letter saying that you are raising your fees for this first time in this Millennium, attach a new fee schedule, and you’re done.  Put the fees into effect not sooner than 60 days after you send the letter.”

“Hold up!” says Rebecca’s associate, Higgins.  “Doesn’t Ted need to check his service agreement to see if there are any provisions that limit his right to change fees or that dictate how it has to be done?  And more importantly, Ted needs to also make sure that he has an agreement in place with his clients in the first place.  If not, this is an opportunity to make sure all his client relationships are properly papered.”

Higgins is the voice of reason at the law firm and often catches Rebecca in a flamboyant moment where she forgets the details.  Higgins is absolutely right.  It’s important to check your service agreement with your clients and see what it says about fee changes.  If the agreement has limitations on your ability to do this, or timing obligations that are different than the law, you may have to jump through more hoops.  For example, your service agreement may require affirmative agreement from your client before you can put the new fees into effect.

“Okay,” Rebecca agrees.  “But if you have any such provisions, give us a call.  It might be wise to amend those out of your agreement at the same time as you do the fee change, so that things go easier next time.”

At that moment, one of the administrators at Ted’s firm walks by Ted’s office and yells out, “Wait a minute!”

Ted says, “Oh, my newest senior administrator just came by and has input!”

“Dani Rojas!  Dani Rojas!” The new administrator sings out his name for those on the other end of the phone.

“Nice to meet you,” Rebecca and Higgins mumble.

“We’re also changing distribution and loan fees!”  Dani says.  “Don’t we need to tell the participants?”

ERISA also requires you to tell defined contribution plan participants about what is being charged to their accounts if the participants direct their investments.

“That’s right.  If you are changing the fees that are charged to participant accounts, you need to give the participants notice, too,” Higgins confirms.

“So, when you send the fee disclosure to your clients, be sure to include a notice for them to give to the participants, advising them of the new fees that are applicable to them.  This notice has to be provided 30-60 days before the new rates apply to their accounts.”  Rebecca pauses for a moment, and then adds, “And don’t forget to tell the recordkeepers to charge the right amounts and when they are effective.”

Ted smiles, “Okey dokey.  Is that all we need to do?”

The lawyers confirm that this is so and enjoy a biscuit.

“Well,” Ted replies, “That’s just great.  I assume that we can do all this before 2023 begins, and just have the fee changes as part of the 404a-5 disclosure that we send before the beginning of the year for the participants.  That’ll save us time and money, a real win-win!”

The lawyers agree.  “Now that you know how easy it is, maybe you’ll start raising fees on a more regular basis,” Rebecca tells him.

Ted says, “Okay, Dani, get moving on this.  Let’s make it our goal to get this done on time!”

“Dani Rojas, Dani Rojas! ERISA is liiiiiffffffe!” Dani sings as he leaves Ted’s office.

Conclusion

If you are thinking of raising your fees, follow Rebecca’s and Higgins’ advice and make sure to do the new client and participant fee disclosures.  Failure to do so can subject you to penalties, including the potential that your service agreement with your clients becomes a prohibited transaction.  So, it makes good sense to follow the rule book.  And if you don’t have any agreement in place, use this as an opportunity to do so.  Not having a service agreement can mean not only that you are engaging in a prohibited transaction, but it can also void or increase the costs of your insurance coverage.  And, it’s really just a bad business decision for a whole variety of reasons.

Best wishes for a profitable 2023!  And, remember, whenever you have questions or problems arise: We are your ERISA solution!