The importance of plan fees has been impossible to miss in recent years—just look at court dockets, if nothing else. And those plan fees can pose a challenge in fulfilling fiduciary duties.
Protecting 401(k) and 403 (b) participants from paying excessive fees is part of plan sponsors’ fiduciary duty—and failing at that is a breach of their fiduciary duty, reminds Roland|Criss in “Retirement Plan Fees Worsen Enterprise Risk.”
Where We Are
There have been a variety of changes affecting how services are provided to employee benefit plans and the expenses that entails. And understanding those fees can be complicated, Roland|Criss notes. Accordingly, they note, to address complications regarding understanding fees the Department of Labor (DOL) commissioned a change to ERISA that requires greater disclosure from vendors about their fees: The “Reasonable Fee Rule”—or rather, the “Fee Rule”—in ERISA Section 408(b)(2).
The recent changes in how services are provided to employee benefit plans and how service providers are compensated have been a double-edged sword.
On the one hand, they have improved efficiency and made administrative services and benefits for plans and their participants less expensive in some ways. Roland|Criss attributes that to:
- the effect of the fee rule;
- increasingly frequent use of index funds; and
- changes in the prices charged for investment advice.
On the other hand, Roland|Criss indicates, the changes introduced complexity that has made it more difficult for plan sponsors to understand what they are paying service providers for.
Fees Figure Prominently
Despite the factors it says reduce fees, many plan fiduciaries nonetheless still pay high fees. And those fees are eliciting complaints.
As a result, “Excessive fee lawsuits and scrutiny by the DOL continue to increase,” says Kizzy Gaul, who is Director of Benefits Advisory & Compliance for WTW, as well as a former member of the ASPPA Leadership Council and former chair of the ASPPA Reporting and Disclosure Subcommittee.
Fiduciary Duty Figures in
“Under ERISA, employers have a fiduciary responsibility to ensure that the services provided to their retirement plan are necessary and that the cost of those services that are paid by the plan are reasonable,” says Gaul; however, she continues, “ERISA lacks explicit guidelines regarding retirement plan fees; instead, the emphasis is on the prudence of a fiduciary’s actions and decisions.”
What can an employer do to fulfill its fiduciary duty regarding plan fees and the services they cover?
Assessing services and fees is a key. To better understand and address fees, the DOL “strongly urges” employers to periodically review the fees charged their retirement plans and document the steps by which fees are proven to be reasonable.
“A well-rounded approach to this fiduciary responsibility involves a comprehensive assessment of the services and benefits that a service provider (e.g. recordkeeper, third-party administrator, investment manager) offers in addition to their fees,” says Gaul.
What would such an approach entail? Gaul says that it “means conducting thorough fee and servicing benchmarking, issuing RFPs, and performing vendor searches with a focus on aligning the chosen vendor with the unique needs and goals of their plan and employees.”
“This may require assistance from an expert,” Gaul says, explaining that, “Once a service provider has been selected, the plan fiduciary has an ongoing obligation to monitor the service provider’s performance and the actual fees that are collected.”
Be careful. Roland|Criss indicates that employers should pay close attention when conducting an assessment—they warn that many businesses conduct such reviews, but that they often use steps that lead to the wrong conclusions.
Gual, too, strikes a note of caution. Establishing a prudent process can help to defend against excessive fee lawsuits, she says, but it is not a panacea—it still may not prevent one.
And because of the risk of personal liability, Gaul says, many plan fiduciaries consider fiduciary liability insurance. “It is especially important to understand what the insurance policy covers and whether there are time-sensitive notice requirements to make a claim,” she says.
The Bottom Line
“A new era of employee activism is underway,” Roland|Criss says, adding that “a crisis among retirement plan sponsoring enterprises is unfolding.” And, they warn, underestimating the fiduciary risks posed by poor plan management—including failure to manage fees—can have broader consequences for an employer’s finances and even reputation.
The challenge for leaders, says Roland|Criss, is to ensure that operations managers have adequate training, and that they make fiduciary risk management a high priority by putting in place appropriate guidelines, controls, and tools.
Ultimately, fees and expenses matter because they “have a cumulative impact on a participant’s retirement savings,” says Gaul.