Plan fees often elicit complaint and sometimes serious action, as lawsuits and court rulings attest. A recent article discusses the Department of Labor (DOL) rules for controlling fees and what they require, as well as how to protect employees from excessive fees.
There is a range of reasons for controlling fees, according to Ronald E. Hagan, Chairman of the Risk Standards Committee of Roland|Criss. In “The Correct Approach for Controlling Retirement Plan Fees” he notes that failure to comply with DOL rules can constitute a breach of fiduciary duty and violate ERISA. But there also are positive reasons for compliance that go beyond the simple fear of enforcement consequences, Hagan suggests, writing, “Organizations that have achieved advanced levels of governance, risk management and compliance in their fiduciary role have realized significant benefits, especially in their plans’ costs.”
Hagan notes that the DOL rule concerning plan fees is contained in Section 408(b)(2), which was added to ERISA seven years ago. Through the rule, the DOL seeks to address its findings that there is an “information gap” between retirement plan sponsors and their vendors. The DOL also seeks to minimize that gap before additional plan sponsors and their participants suffer further damage. Hagan writes that while the law does not stipulate how to determine if a vendor’s fees are reasonable, “one thing is very clear: employers inherited a sea change in their fiduciary role and responsibilities.” He continues, “The rule imposes a hefty responsibility on plan sponsors — requiring them to become more involved and scrupulous with their vendors in order for the rule to have its intended positive effect on the market.”
A Closer Look
Hagan notes that the rule requires vendors to disclose their fees to plan sponsors, but that what is more important and has a bigger impact is what the rule requires of plan sponsors after the fees are disclosed to them. In short, he says, the rule requires them to determine if the fees are reasonable. To do that, they are required to:
- verify that they have received the appropriate disclosures from vendors;
- test that the disclosures are adequate; and
- determine that the fees are reasonable, or fair, given the services the vendor renders.
Hagan adds that when fees are evaluated, the steps in that evaluation should be documented and kept in a plan’s fiduciary file. That, he suggests, could be useful if the DOL audits the plan.
But that is not all that’s entailed in fulfilling the attendant fiduciary duties. Simply relying on benchmarking the fees is not the right approach, Hagan writes; it also is necessary to assess vendor fees and practices. This, he says, entails clarifying and updating arrangements when necessary, shining light on what and how plan fees are paid, understanding and challenging fees that are unbalanced or unfair and analyzing the vendor’s performance and value.
Added Significance
Assessing fees has importance beyond fulfilling fiduciary duties, Hagan argues. “A tangible result of the fee assessment is that it proves that a plan sponsor is working to adhere to a high level of fiduciary care,” he writes, adding that it “stands as firm testimony to a plan sponsor’s intention to adequately fulfill fiduciary responsibilities and update policies as needed when regulatory changes occur.” And that, he says, puts one in a “distinctively advantageous position” and can afford protection from fiduciary duty.
Further, Hagan suggests that the process can enhance a relationship between a vendor and a plan sponsor. “Instead of viewing the Reasonable Fee Rule as an increased burden, vendors and plan sponsors may view it as an opportunity to mend a relationship that has been misaligned for many years,” he writes. Not only that, he says, it will enhance employees’ retirement outcomes.
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