Allocating Shared Retirement Plan Expenses: Why the Process Matters as Much as the Methodology

Disclaimer: This article is intended to provide general information regarding the allocation of shared retirement plan expenses and should not be construed as legal, tax, accounting, or investment advice. The appropriate allocation methodology and fiduciary process will depend on the specific facts and circumstances, including the services provided and the benefit received by each plan. Plan sponsors and fiduciaries should consult qualified ERISA counsel and other appropriate professional advisors before adopting or changing an expense allocation approach.

Organizations that sponsor multiple retirement plans often face a practical challenge that receives far less attention than investment oversight or fee disclosures: determining how to allocate expenses when a service benefits more than one plan. A plan sponsor may maintain a defined benefit (DB) plan alongside one or more defined contribution (DC) plans, all of which rely on common services such as nondiscrimination testing, actuarial consulting, compliance support, audit coordination, or administrative review. When a single invoice supports multiple plans, fiduciaries must determine how the cost should be shared. 

While much of the discussion surrounding plan expenses focuses on whether a cost can be paid from plan assets, that question is often only the starting point. The more difficult issue is determining how expenses should be allocated among plans that receive the benefit of the service. In many cases, there is no prescribed formula, leaving fiduciaries responsible for making a reasonable decision supported by a prudent process and thorough documentation. 

The Real Question Is Often Allocation, Not Eligibility

Fiduciaries are generally familiar with the distinction between settlor expenses and plan administrative expenses. Settlor expenses typically relate to business decisions regarding the design, establishment, or termination of a plan and generally must be paid by the employer. Administrative expenses, by contrast, are associated with operating and maintaining the plan and may often be paid from plan assets.

For example, nondiscrimination testing is commonly viewed as an ordinary administrative function necessary for plan compliance. If the testing expense is properly chargeable to plan assets, fiduciaries may believe the analysis is complete. However, when the testing benefits multiple retirement plans, an additional fiduciary question emerges: How should the cost be divided among those plans? 

This distinction is important because a permissible expense can still create fiduciary concerns if the allocation method improperly favors one plan over another. Once a fiduciary determines that an expense may be paid by the plan, attention should shift to whether the distribution of that expense is fair, reasonable, and supported by a rational basis. 

Where Fiduciaries Enter a Gray Area

Unlike many other areas of retirement plan administration, expense allocation among multiple plans is not governed by a detailed set of formulas. Fiduciaries generally will not find a Department of Labor rule that directs them to use a specific methodology in every circumstance. Instead, they must apply fundamental fiduciary principles, including acting prudently and solely in the interests of participants and beneficiaries. 

Consider a sponsor that maintains an overfunded defined benefit plan and two defined contribution plans. To satisfy compliance requirements, the sponsor performs cross-testing involving all three plans. The resulting testing and consulting fees reflect work performed across the entire retirement program rather than for a single plan. In this situation, charging the entire cost to one plan may be difficult to justify if all three plans benefited from the service. 

The lack of a prescribed rule does not reduce fiduciary responsibility. In fact, it increases the importance of fiduciary judgment. Committee members must carefully consider who benefited from the service and whether the proposed allocation reflects that benefit. 

Common Approaches to Allocating Shared Expenses

Several allocation approaches are commonly used in practice. Each has strengths and limitations, and the most appropriate methodology depends on the specific facts and circumstances. 

Equal Allocation

Under this approach, expenses are divided equally among the plans that benefited from the service. For example, a $15,000 testing invoice benefiting three plans would result in a $5,000 charge to each plan.

This method is simple to administer and easy to explain. It may be appropriate when the plans are similar in size and derive similar value from the service. However, equal allocation may be difficult to justify if one plan has substantially more participants or requires significantly more work.

Participant-Based Allocation

A participant-based methodology allocates expenses according to the number of participants in each plan. If one plan represents 60% of the participants, that plan would generally bear 60% of the allocated expense. 

This approach can be particularly useful for services that correlate closely with participant activity, such as participant communications, account administration, or certain compliance processes.

Before applying this methodology, fiduciaries should verify that participant counts are current and that participant headcount reasonably reflects the effort associated with the service being allocated.

Asset-Based Allocation

Some sponsors allocate expenses based on plan assets. A plan holding 70% of total assets would be responsible for 70% of the cost. This methodology is often used for investment-related services where the size of plan assets is closely connected to the level of oversight or management required. 

Fiduciaries should carefully evaluate whether asset size is truly relevant to the service provided. For certain compliance, testing, or administrative services, participant counts or another measure may better reflect the benefit received.

Benefit- or Service-Based Allocation

A more customized approach allocates expenses according to the estimated work performed or the relative benefit received by each plan. For example, consultants may estimate that 50% of a project related to a defined benefit plan and 25% related to each of two defined contribution plans. Expenses would then be allocated according to those estimates. 

This approach can provide the closest alignment between cost and benefit. However, it also requires the greatest amount of judgment and supporting analysis. Fiduciaries should be prepared to explain how percentages were determined and maintain documentation that supports those conclusions.

Why Documentation May Matter More Than the Methodology

In many situations, more than one allocation methodology may be reasonable. A fiduciary committee could review the same expense and appropriately select different allocation methods depending on the facts involved. What often distinguishes a defensible decision from a problematic one is the quality of the documentation supporting it. 

Fiduciaries should be prepared to answer several basic questions:

• Why was this methodology selected?
• How does the method relate to the services provided?
• How does the allocation reflect the benefit received by each plan?
• Why does the approach avoid favoring one plan over another? 

Strong governance practices can help create a clear record of fiduciary decision-making. Effective documentation may include committee reviews, meeting minutes, written allocation policies, supporting calculations, and periodic reassessments of existing methodologies. These materials demonstrate that fiduciaries actively evaluated the issue rather than simply applying a default approach. 

Questions Fiduciaries Should Ask Before Allocating Shared Expenses

Before approving an allocation, fiduciaries should consider the following questions:

1. Who benefits from the service?
2. Is the benefit relatively equal across all plans?
3. Is one plan bearing a disproportionate share of the cost?
4. Does the proposed methodology have a rational basis?
5. Has the rationale been documented?
6. Would the committee be comfortable explaining the decision during a Department of Labor examination? 

Working through these questions can help identify potential concerns before expenses are charged and create a stronger record of fiduciary oversight.

Building a Defensible Process

Rather than evaluating each invoice from scratch, fiduciaries should consider developing a repeatable framework for handling shared expenses. A structured process can improve consistency, reduce uncertainty, and support committee decision-making over time. 

A practical framework may include:

• Identifying expenses that benefit multiple plans.
• Determining which plans received the benefit.
• Evaluating potential allocation methodologies.
• Selecting and documenting the chosen approach.
• Reviewing allocations periodically to confirm they remain appropriate. 

Consistency is also important. Frequent changes to allocation methodologies without documented reasoning can create unnecessary questions. When circumstances justify a change, fiduciaries should clearly document why the prior approach is no longer appropriate and why the new methodology better reflects the facts. 

Strengthening Fiduciary Oversight Through Consistent Allocation Practices

ERISA does not provide fiduciaries with a detailed rulebook for allocating shared plan expenses, but it does establish a clear fiduciary standard: act prudently, reasonably, and in the best interests of participants and beneficiaries. When multiple plans benefit from the same service, fiduciaries should focus on creating a thoughtful, repeatable, and well-documented process for allocating costs. Doing so can help demonstrate prudent decision-making and strengthen fiduciary governance over time. 

As retirement plan structures become increasingly complex, plan committees should periodically review their expense allocation practices, update supporting documentation as needed, and consult experienced retirement plan advisors when allocation questions arise. A well-supported process can help fiduciaries navigate gray areas with greater confidence and provide a stronger foundation for regulatory scrutiny. BDO's professionals across Global Employer Services and Employee Benefit Plan Audit can help you evaluate current practices and implement a documented, repeatable process aligned with fiduciary responsibilities. Reach out to our BDO team for guidance tailored to your plan structure and circumstances.