Continuing focus on defined contribution plan fees by litigators, regulators and the media has made it clear that fiduciaries must understand and determine “reasonable” fees being paid from a DC plan. This is a basic fiduciary duty under ERISA. Since fiduciary liability is personal, sound risk mitigation calls for a rigorous process to establish reasonable fees on an ongoing, regular basis. As equally important, though not as widely discussed, is consideration of whether existing payment methods fall disproportionately among participants.
Why you should review your plan fees?
Understanding the current market pricing practices of DC recordkeeping vendors, and benchmarking services against fees, provides documented risk mitigation and is a best practice for fiduciaries. In establishing reasonable fees, an independent review is imperative. Relying on the current vendor to ascertain reasonable fees, or using comparative data limited to “like” plans, may not be persuasive in establishing a defense should a plan sponsor be subject to litigation. Also, plan sponsors need to understand their marketplace buying power in order to effectively negotiate fees with their vendor.
When should you review your plan fees?
On a regular basis, as often as you review investment results, you should also review each fund’s expense ratio offered under the plan against the criteria outlined in your investment policy statement. Based on comments from the DOL and recent court decisions, benchmarking your administrative fees should be completed every two to three years. Further a formal service and fee Request for Proposal (RFP) should be performed every three to five years.
What are the best practices for reviewing fees?
Review and Assess: In the years you don’t complete a full RFP, you should benchmark your plan’s cost and services against “active” quotes obtained from at least three vendors. This makes it clear to the current vendor that you aren’t actively seeking to replace them but looking to fulfill your fiduciary obligations. This process also allows bidding vendors to showcase market pricing and services without the time and expense of completing a full RFP.
Prepare a customized request for administrative fees based on actual service provided. Solicit fee quotes from leading vendors that actively compete for business with the current vendor. If desired, the current vendor can be solicited to provide a revised bid.
Act: If current fees are above marketplace levels, negotiate to achieve a more favorable fee or service arrangement with the current vendor. If the plan fiduciaries consider the fees to be reasonable, document your efforts taken on behalf of the plan participants.
In completing your review, also consider how the payment of fees is spread over the employee population. If you haven’t already done so, consider changing to a method that more evenly spreads the cost among all participants. If the fiduciaries have already moved to an equitable allocation, document this to provide evidence of the fiduciaries’ ongoing diligence in reviewing this crucial subject.
Finalize the Process: Three to six months after agreement on any changes are reached, work with your vendor to provide an assessment of the actions taken as a result of the fee benchmarking study to ensure the agreed-upon steps have been completed. Assess current fees against any new agreements and the current environment.
Remember to complete these steps on an ongoing basis to best protect you and your co-fiduciaries.