Retirement Plan Fees: Top 3 Questions Answered
I recently participated in a panel discussion on fee monitoring at the PLANSPONSOR National Conference. Based on the dialogue and level of interest, I thought a summary of the topic with answers to the most frequently asked questions we receive from plan sponsors, detailing best practices, would be valuable. I have also included links and references to articles from some of my peers at Cammack Retirement Group that provide additional detail.
With retirement plan fees serving as the centerpiece of fiduciary breach lawsuits, it is no wonder that this is the leading topic of interest with retirement plan fiduciaries.
1. What fees should be reviewed and how frequently?
Plan fiduciaries should review fees and services on a regular basis, with a focus on the reasonableness of fees.
- Investment fees and performance should be reviewed at least annually, with many plan sponsors performing quarterly reviews. As part of this review, it is important that the share classes of the investment options be evaluated, likely on an annual basis, in an effort to attain the share class with the lowest net cost—which may not necessarily be the share class with the lowest expense ratio. [Please see Mutual Fund Share Class Evaluation: A Focus on “Net” Costs for more information.]
- Recordkeeping fees should be benchmarked annually, and a more formal recordkeeper search and selection process should be conducted approximately every three to five years. A request for information (RFI) is a streamlined approach for soliciting fee and service proposals from recordkeepers, while a request for proposal (RFP) is a more extensive process that should be conducted if a plan sponsor is seriously considering moving to a new recordkeeper. [Please see Best Practice: Conduct a Vendor RFP Every 3-5 Years for more information.]
- Other service provider fees should be evaluated on an annual basis, including audit fees and investment advisory and consulting fees. If there are concerns regarding the quality of service being provided or the level of fees being paid an RFP should be conducted. [For more information on conducting an advisor search process please see Four Steps to Selecting a Retirement Plan Advisor.]
2. What benchmarks should be used when comparing fees?
- Investment fees should be compared to peers in the same investment category (e.g., large cap blend). These fees must be reviewed in conjunction with investment performance versus the category and the index (e.g., S&P 500 for a large cap blend fund). In some instances, the fund may have a custom benchmark defined by the investment manager, which should be used for comparison purposes.
- Service provider fees, of which record-keeping fees are typically the most significant, should be evaluated and compared to plans of similar size and type that are receiving analogous services. While each plan is unique, making an “apples to apples” comparison imperfect, evaluating fees against similarly situated/sized plans provides a good reference point.
3. What is the best way to allocate recordkeeping fees to participants?
Plan sponsors are grappling with determining whether participant fees should be calculated based on a percentage of assets (i.e., pro rata), or whether all participants should be assessed the same flat dollar fee (i.e., per capita). While the Department of Labor (DOL) has not opined on one methodology being better than the other, this topic has been raised in the fiduciary breach lawsuits brought against several large universities.
While each methodology has its merits, it is important that retirement plan committees understand their options. A per capita fee may be the simplest for participants to understand; however, it is inconsistent with how investment management fees are charged and is a regressive fee (i.e., lower balance participants play a greater proportion of fees). Conversely, a pro rata fee is consistent with the methodology of investment management fees and is a progressive fee (i.e., the larger the participant’s balance, the larger the fee to that individual). [Please seeFee Allocation in Retirement Plans for more information.]
It is important to note that the methodology selected for recordkeeping fees (pro rata or per capita) can be different than the methodology used to actually allocate the fees to participants. For example, some plan sponsors elect a per-participant cost for recordkeeping fees, but allocate the total fee to participants on a pro rata basis, based on the participant’s account balance.
Ultimately, having a sound fiduciary process is what’s most important. Conducting regular reviews, documenting the process and details that lead to decisions, and having a regular forum to discuss plan issues and consider alternatives keeps the plan up to date and benefits plan participants. Following best practices, adhering to DOL guidance, and monitoring fiduciary breach litigation will help fiduciaries protect themselves and their plan participants.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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