CBIZ : Retirement Plan Fees – Fiduciary Best Practices

If your business sponsors a qualified retirement plan subject to ERISA, such as a 401(k) plan, it's important to pay attention to fees and expenses. As a fiduciary to the plan, it is not only a practical matter but also a requirement under the law for you to do so. In recent years, the Department of Labor has issued a number of regulations to help improve transparency and assist both plan sponsors and participants in understanding the fees and expenses of their retirement plans.

When you sponsor a plan, you engage a variety of service providers. These service providers are required to provide you, and ultimately your participants, with information on the extent of the costs for services provided. All of the fees and expenses for these services fall into broad categories of direct or indirect compensation. Direct compensation are amounts paid directly by the plan. Indirect compensation are amounts paid through the investments by way of revenue sharing.

Revenue sharing, when applicable, is an investment expense above and beyond the investment manager's fee, which is included in the investment's gross expense ratio. This excess fee is collected by the investment provider and passed back to the service provider to cover expenses. The revenue sharing received is often inconsistent among investment options, which can create inequity between participants as it pertains to paying plan costs. It is recommended that plan sponsors evaluate revenue sharing to remove revenue sharing when possible or at a minimum, move to fee levelization.

Plan fees and expenses also include investment fees. The investment options available to participants in a plan charge a fee for the management of the fund. This fee is then taken into consideration when the fund's performance is calculated, which in turn affects the return of participants invested in the fund. As a result, it's important for plan fiduciaries to monitor the fees, and performance, of the various investment options available to participants.

While many employers that have been involved in litigation over the past several years have settled out of court, neither admitting nor denying charges against them, there have been some cases where the plan sponsor prevailed. Most of the litigation has involved the alleged breach of fiduciary duty, generally in two areas - plan fees and investments.

Plan fiduciaries were alleged to have allowed the plan to pay 'excessive fees.' The plaintiffs oftentimes include some form of comparison of what their plan is paying versus what other plans of similar size are supposedly paying in terms of fees. Because ERISA requires plan fiduciaries to ensure that their plan pay only 'reasonable' fees, if participant plaintiffs can do a provider fee comparison, plan fiduciaries should do the same, on a periodic basis. Whether running a request for proposal or a less formal industry benchmarking, the point is to compare what the plan is currently paying for services to what others of similar size are paying for the same services. The results of all fee comparisons should be documented, along with the reasoning for any decisions made based on the findings.

In addition to plan fees, investments also played a part in the majority of the litigation. The allegations were that plan fiduciaries did not properly review the plan's investments, nor did they pursue the lowest available cost share class of an investment option. In the cases where the plan sponsor prevailed, the fiduciaries were able to produce documentation to show that they monitored and discussed the investments' performance, expense ratios, risk characteristics, etc. and compared their investments to other available options.

It was the prudent, properly documented process that the courts found compelling enough for the fiduciaries to prevail. We can learn from this that plan fiduciaries need to have a process in place to review the plan's investment options, inquire about lower cost versions of those investment options and properly document the process and discussions that take place.

It is also important to make sure that fees are transparent and efficiently communicated to participants. The bottom line is, if you have not studied the fees and expenses of your 401(k) plan, you should.

The charge by the Department of Labor is to determine 'reasonableness.' That does not mean you must have the lowest priced plan. As with any other purchase, compare the costs incurred to the service and benefits provided. A qualified resource, such as your broker or an advisor, can assist you with benchmarking the fees within your plan.

More Information

To learn more, visit our website: www.cbiz.com/retirement.

CBIZ Retirement Plan Services is a trade name under which certain subsidiaries of CBIZ, Inc. (NYSE Listed: CBZ) market investment advisory, investment management, third party administration, actuarial and other retirement plan services. Investments, investment advisory and investment management services offered through CBIZ Financial Solutions, Inc., Member FINRA, SIPC and Registered Investment Adviser, dba CBIZ Retirement Plan Advisory Services. Investment advisory and investment management services may also be offered through CBIZ Investment Advisory Services, LLC, Registered Investment Adviser. Third party administration, actuarial and other consulting services offered through CBIZ Benefits & Insurance Services, Inc.