One of your primary duties as a fiduciary to your retirement plan is to monitor and control plan costs...
...In fact, most recent retirement plan fiduciary litigation has centered on excessive plan fees versus a specific issue related to investment performance regarding one or more of your plan investments. Legally, you don’t have to have the least expensive plan providers, but you must be able to prove that you’re routinely paying attention to cost and that you are truly getting “value” for the services delivered. And remember, since many of these costs are paid right out of plan assets, the one sure way to improve investment performance is to keep these costs as low as possible.
The first step in fulfilling your fiduciary duty here is to identify all the costs that come out of the plan. Typically, they include the following:
Money Management – All the investment funds in your plan have management fees often referred to as the “expense ratio,” and most often expressed in basis points or as an annual percent of the plan assets invested in the fund. This is usually the largest plan expense, and you don’t get a bill for them. They automatically come out over the course of the year, and investment returns are reported by your funds after these fees.
Custody – All the investment funds in the plan are held and traded by a common custodian for efficiency purposes. Their fee is also expressed in basis points or as a percent of total plan assets, and you may or may not actually see a bill for these services.
Recordkeeping – This is the fee for day-to-day operations of your plan. These services typically include contribution and distribution processing, keeping track of what each participant has in each of your investment funds, the movement of money between these funds upon request, statements, websites, and call centers. Think of it as shareholder accounting fees, and may be a flat dollar amount per year, a flat per participant fee per year, or in basis points or an annual percent of total plan assets per year, or a combination of these. These fees are generally billed either monthly or quarterly, and may include a set number of onsite employee education days.
Administration – Your plan is a highly regulated tax-preferred trust overseen by the Internal Revenue Service and the Department of Labor. Consequently, there are numerous annual testing and reporting requirements that must be met. Oftentimes, your recordkeeper performs these duties, and packages it in their overall fee quote; but sometimes a separate organization called a third-party administrator (TPA) handles all administrative services. These fees are likewise billed either monthly or quarterly.
Trustee – All plan assets are held in trust on behalf of plan participants, so the plan must have a trustee. Small employers often self-trustee the plan, but larger employers seldom do. It is not uncommon to see these fees packaged with the custody or recordkeeping fee.
Fiduciary Investment Advisory Services – You as the plan sponsor have the fiduciary responsibility to select and monitor the investment funds in the plan. You can outsource some or all of these duties to outside professionals that specialize in this service. Some of these providers may even provide employee education and investment advice to your participants, and there is even an emerging trend to offer full financial planning services to your plan participants. Fees for these services are most commonly expressed in basis points or as an annual percentage of plan assets, but plan-level-only service is quickly moving to a flat dollar amount fee per year. You will receive a bill for these services, commonly on either a monthly or quarterly basis.
Audit – Plans with over 100 participants must be formally audited by an independent professional each year – most often a Certified Public Accountant. These fees may be quoted as a flat dollar amount per year, but more commonly are billed at an hourly rate.
All of these fees can be paid out of plan assets, and when they are you as the plan sponsor have the fiduciary responsibility to monitor and keep them as low as possible. A best practice is to formally do this annually in writing, making it part of the minutes of the plan’s Investment Committee or Administrative Committee. A good fiduciary investment advisor should do this for you, and benchmark your fees relative to other plans your size from available national plan databases. As a fiduciary, your investment advisor does have his or her neck-in-noose, too. Some, but not many, plan sponsors effectively get their neck out of the noose by paying for most of these expenses out of the company checkbook; but this is tough to do for most money management fees charged by the investment funds.
One fee that cannot be legally paid from plan assets is for the required plan documents. This is a very common oversight, and can result in financially painful fines and penalties.
I hope this helps and provides some clarity. This is a very important and complicated area which lacks uniformity among the numerous plan providers.
As a plan sponsor, you should demand fee transparency and full fee disclosure. If you have not negotiated your fees in the last four years or so, you should. There has been dramatic fee compression. Give us a call if you need help. We have helped plan sponsors reduce their fees by 25% or more.
Look for my next blog on “Retirement Plan Cost Saving Strategies” in the next few weeks.