A little-noticed change to the federal Employee Retirement Security Act (ERISA) permits plan administrators to charge QDRO processing fees for a 401(k) to plan participants and alternate payees.
Prior to May 2003, the federal regulations precluded plan administrators from charging individual accounts for the review, approval and implementation of QDROs. As of May 2003 the federal regulations were changed to permit administrators or employers to charge the employee for this service. This change in a 1994 Field Advisory Opinion has raised concerns among divorce lawyers, 401(k) plan administrators and firms hired to process QDROs over the reasonableness of fees and potential violations of the plan administrator’s fiduciary responsibilities.
Some outsourcing firms charge significantly higher fees if a QDRO does not exactly conform to the company model – fees that may run well over $1,000, sometimes three of four times higher than those processing the company model. For example, the former US Airways Group Inc., which outsourced QDRO processing to Fidelity, began charging individual accounts in June — $300 if employees use one of Fidelity’s Web-based QDROs and more if they don’t.
To be sure, such charges may barely be noticeable, considering the cost of divorces in the United States today. But QDRO fees can get very high if employers don’t have set charges. For example, processing can run up to $10,000 if an employee repeatedly sends in an incorrect QDRO or up to $30,000 if disputes arise between employees and employers over how plans can be split, lawyers say.
Basic to ERISA’s designation of plan administrators as fiduciaries is the assumption that they act “solely for the benefit of plan participants and certainly not as a ‘cash cow’ for an outside entity.” In challenging the higher charges, an attorney may argue that they are “a violation of the plan’s fiduciary responsibility to operate ‘solely in the interest of participants.’” According to the Department of Labor (DOL), “….if the method of allocation has no reasonable relationship to the services furnished….a case might be made that the fiduciary breached his fiduciary responsibility to act prudently and ‘solely in the interests of the participants’ in selecting the allocation model.”
Usually, one of the attorneys or a pension consultant prepares the QDRO, which is the order dividing a spouse’s pension, retirement benefits or 401K accounts at the time of a divorce, and submits it to the plan administrator for review, approval and implementation, which is called qualifying. Under federal law, a QDRO doesn’t technically become qualified until an employer makes sure it fits certain requirements of the tax code. This processing that can run from hundreds to thousands of dollars, depending on how much legal advice a company needs. According to The Wall Street Journal, pension plans and employers are now regularly deducting the costs related to the QDRO from the plan. By charging higher fees to clients who use their own QDROs, outsourcing firms are “essentially undermining the rights of plan participants and alternate payees.”
Attorneys for divorce litigants must be aware of this change and bargain for the allocation of these costs just as they do the allocation of the costs of preparing the QDRO. Otherwise, the plan owner may have the full cost assessed against them.
In challenging the charges, an attorney for a client who faces higher fees for an attorney- drafted QDRO should review the DOL Field Assistance Bulletin as a first step, then contract the plan’s sponsor’s legal or human resources department to plead the case.
A lawyer should write the plan administrator asking for an itemized explanation of the processing costs for a 401(k) QDRO, including the level of personnel review for a lawyer-drafted QDRO, their pay, the number of hours required for the review. When QDRO processing is outsourced, the lawyer should write directly to the plan fiduciary, the plan administrator, to question if the practice is in keeping with their responsibility to act as prudent fiduciaries.
