Keeping 401(k) plan fees in check without compromising quality service
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Let’s first take a look at the facts. We’re continuing to see an influx of litigation over the reasonableness of retirement plan fees. While most of the lawsuits involve investment fees, we’re also seeing increased scrutiny as it relates to the reasonableness of service provider fees. In the auditing world, this correlates with increased focus on quality retirement plan audits. At the crux of the issues is fiduciary responsibility or the lack thereof.
So, what should you do as a plan sponsor? And in turn, what are we advising our clients to do as their auditors?
- Set up a retirement plan committee (if you don’t already have one). The committee’s responsibilities may also include other benefits such as health plans. Plan fiduciaries that make up the committee should be those individuals with oversight, trust, or administration responsibilities over the retirement plan.
- Hold regular retirement plan committee meetings with plan fiduciaries. Include your service providers and advisors (considering hiring if you don’t already have) in these meetings to ensure regular, comprehensive discussions are taking place. Include plan fees and related services on the meeting agendas among other relevant topics.
- Document and retain important discussions and decisions through committee minutes. If there’s no documentation, it didn’t happen.
- Understand what each plan service provider does and how much the services cost (e.g. third-party administrator, recordkeeper, trustee/custodian, investment advisor, auditor).
- Check with your trusted advisors for referrals and vet out prospective providers based on factors other than merely cost.
- Ask key questions (such as the below) when evaluating a switch to a new service provider or the quality of existing providers. Consider the timing of a potential switch and how this impacts plan participants, administrators, services, and the audit process (if applicable).
- How much are the fees per investment?
- What other fees may be assessed?
- Is there a revenue-sharing arrangement (and understand what this means)?
- Which fees are each party responsible for (e.g. plan sponsor, participant)?
- Are any services bundled and what’s your core business?
- Is any fiduciary responsibility/liability shared by you?
- What qualifications do your professionals have?
- Will you assist us in understanding our plan document provisions and ensure we’re properly administering our plan?
- Who’s responsible for ensuring appropriate plan amendments take place?
- What support will be provided by you when issues are uncovered either through audit or other examination?
- Closely monitor fees being run through your retirement plans and ensure rates are competitive through market data and/or a bidding process.
What does it boil down to? Lower fees don’t normally correlate with high-quality services so while as a fiduciary you’re expected to monitor reasonableness of fees, be aware of hidden costs that are likely when proper oversight and advisory are lacking.
For instance, errors related to eligible compensation and employee/employer contributions are often discovered during audits and are typically time consuming and costly to plan sponsors. Lastly, be mindful of service providers that are bundling services. While this may be advantageous it might also present problems when providers are reaching outside of their core business (consider 180 and 360 integrations if non-bundled services are a better fit) so proper oversight is key.