Settlor and Administrative Expenses: What’s the Difference?

The Department of Labor has recently focused on the payment of settlor expenses from plan assets.  As defined in the resource linked below from Mass Mutual, the DOL has, for a long time, taken the position that there is a class of discretionary activities which relate to the formation, rather than the management of plans.  These activities are referred to as “settlor functions” and they generally include decisions relating to the establishment, design and termination of the plan.

Expenses which are considered to be settlor expenses must be paid by the plan sponsor.   An improper payment of expenses from plan assets can result in significant consequences, such as a breach of fiduciary duty, a prohibited transaction, or a violation of the exclusive benefit rule.

An example of settlor expenses would be the cost associated with the evaluation as to amend the plan to enhance benefits or terminate the plan.  Advisors should be careful in the language in the service agreement if they are being paid by plan assets.  Recent DOL investigations of RIA firms has indicated certain advisory services described in the RIA’s service agreement could be considered a settlor expense.  If the advisor is being paid from plan assets this could be considered a prohibited transaction.

In summary, the Mass Mutual article is a very good reference defining the difference between a settlor expense and an administrative expense.  Advisors can create value by assisting their plan sponsors in evaluating and classifying the expenses being paid from plan assets. In addition, this would be a good topic of discussion when marketing to plan sponsors.