Most plan sponsors understand they have a fiduciary responsibility to ensure fees associated with their retirement plan are comprehendible and reasonable. The question is, how does one determine what is and is not reasonable in the eyes of ERISA? To answer this question, plan sponsors must consider the services that are provided to their plan and whether or not those services are cost effective and satisfy the needs of the plan participants and their beneficiaries compared to the industry average.
How Often Should a Plan be Benchmarked?
Every three years is a best practice when it comes to benchmarking a plan’s fees and services. Although, larger, faster growing plans should consider more frequent benchmarkings. This is particularly true if a large, rapidly growing plan is paying an asset based fee for recordkeeping or advisory services. As plan assets grow, so does the cost to run the plan. Plan sponsors should be cognizant of the growing cost and whether or not the fees appropriately match the services provided.
Cheapest Isn’t Always Best
Cheapest is not always the best. Everyone can attest to that at some point in their lives. Retirement plan services are no different. Consider the necessities of your plan and seek a vendor/investment manager who will provide those services at the most competitive prices. Does the lowest cost vendor provide mailing of notices or hardship determinations within their cost? Confirm and understand exactly what services are included in each provider’s proposal. The complexity of your plan is also a driving factor when assessing cost. Does your plan have multiple benefit structures or vesting schedules, benefit formulas that require special testing or a variety of different payroll cycles? The more complex your retirement plan is, the more you should expect to pay for services.
Break Down All Costs
Many plans focus on their “all-in” cost, which is important. However, there should be an emphasis on reviewing each plan expense individually as well. For example, if a plan is considered to be unbundled, plan sponsors should consider recordkeeping fees, third party administrative fees, investment fees and advisor fees (if applicable). For bundled plans, review the cost and benefits of the vendor providing both recordkeeping and administrative services. Are there advantages such as a broader range of investment options? Perhaps price concessions can be made for considering proprietary investment management if the investment meets the plan’s IPS and investment objectives. Not all proprietary products, whether it be separate account investments or fixed accounts, are inappropriate when considering a plan’s cost and needs.
Conducting a plan benchmark is a considerable task. Unfortunately many plan sponsors wear several hats within their firm so dedicating hours to this process can be difficult. Incorporating an advisor to service your retirement plan will help ensure the benchmarking process is handled effectively and delivered in a consistent and timely manner. Fees are a considerable factor for retirement plan litigation. Plan sponsors should manage their fiduciary liability by bringing on experienced retirement plan professionals to aid their team.
This information is not intended as authoritative guidance or tax or legal advice.