Nondiscrimination Testing: Good Value Add?

The subject of fees continues to generate a lot of attention, according to Michael Adamson, an Employee Retirement Income Security Act (ERISA) plan administration business development specialist, consultant and principal at Evergreen Benefit Services LLC.

However, Adamson points out, a greater level of service provided can be a way to illustrate the reasonableness of higher fees. Although some members of the industry may equate reasonable fees with minimal service in order to lower what they charge to plan providers and sponsors, this is wrongheaded, Adamson feels. “Participants need services,” he says, “and the providers—recordkeepers, advisers, third-party administrators [TPAs]—need to charge a certain fee for the services they provide.”

As long as an adviser charges fees that are commensurate with the level of service, the fees are compliant. “You have to take it on a case-by-case basis,” Adamson says. “Every company is different. Some companies like quarterly service visits to talk about the plan, advice for participants and other services.” Others take a limited approach to providing a retirement plan, so a key part of the fee question will be assessing the service level.

One task Evergreen Benefit Services performs for retirement plans is nondiscrimination testing according to the 410(b) rules of the Internal Revenue Service (IRS). 

Performing nondiscrimination testing on a plan is a complex process, Adamson says. “It’s very involved, with schedules on the Form 5500, and can be straightforward or complicated, depending on the type of plan.” Adamson says his firm tests plan data and gives the plan sponsor a precise description of the tests they performed on the plan in order to be able to draft the report that goes to the Department of Labor (DOL).  

A great deal of detail goes into this task, he says, and it varies depending on the type of compensation and contributions that go into a plan. Profit-sharing in a plan will mean a large amount of mathematical testing, Adamson says, from the sources of money, the amount of salary deferrals, the company match and profit-sharing. “It can get extraordinarily complex,” he say. “How much can you give to various individuals without discriminating against non-highly compensated employees?”

Testing the Data

Among the most complex of plan tests is the average benefits test. Adamson says the data must pass certain tests, and the plan sponsor may have to make adjustments to the contributions in the plan. “So you test data using all the allowable methods permitted by the IRS,” he says, “and that’s when you get into a lot of mathematical calculations. You are comparing the amount of contributions you’re contributing to non-highly compensated versus the highly compensated employees. It’s volumes of mathematical information.” 

Even safe harbor 401(k) plans that are not subject to nondiscrimination tests must still be tested for 410(b) coverage, Adamson says, and can require lengthy and time-consuming testing.

The work of nondiscrimination testing can be set forth on the invoice so plan sponsors understand what goes into it. The task will require different fees depending on the type of plan, Adamson says, whether safe harbor or profit-sharing. Each plan will need a different number of hours, but the data used in testing has to come from the plan sponsor, which potentially can generate more fees. “When we place a request for the data, if we don’t get a timely response or we receive incomplete information, then we have to go back to the plan sponsor and re-request it, which takes up more time,” he says.

Adamson uses billable hours to set fees, with a best-guess estimate for certain services that details the amount of service rendered. “When the invoice comes out, the client has a full understanding of how much service is given,” he explains. The prearranged fee comes with the understanding that if additional services are rendered, there will be additional fees. “It is similar to working with a  CPA or an attorney,” he says. “If they incur additional billable hours, we let them know there will be additional fees.”