In the past several years, retirement plan fees have come under more scrutiny from the IRS, the Department of Labor (“DOL”), and even plan participants, as everyone has an interest in ensuring that plan sponsors fulfill their fiduciary responsibilities to ensure that plan fees are reasonable, plan investment choices are appropriate, and plan sponsors are properly and timely notifying participants of their eligibility to participate in the Plan.
Retirement plan fees are compensation to service providers that can include investment management fees and recordkeeping fees. To reiterate the importance of ensuring reasonableness of the plan fees, the Department of Labor implemented fee disclosure rules under section 408(b)(2) of ERISA that became effective on July 1, 2012. Under this regulation, the plan sponsor is required to distribute to the plan’s participants, beneficiaries, and eligible nonparticipating employees, information concerning compensation paid to the plan’s service providers. If the plan sponsor fails to comply with the disclosure rules, they are considered in violation of ERISA’s prohibited transaction rules and subject to penalties under the Internal Revenue Code.
The most common method used to determine reasonableness of the retirement plan fees is to go through the process of benchmarking the fees. Benchmarking provides comparisons of the fees paid to the plan’s service provider against other service providers for comparable services. The cost is not the only factor to consider when it comes to determining reasonableness of the fees, the plan fiduciary should also consider the level of services that are currently being provided by the service provider as well as experience and reputation of the service provider. Other factors that are deemed important should also be considered. Benchmarking should be performed at least on an annual basis and properly documented by the plan fiduciary. Documentation should include the information reviewed, factors that were considered, results of the analysis and the decision made by the plan fiduciary, whether it is to keep or look into another service provider with a lower fee structure.
Plan fees are sometimes obvious, such a per participant fee or an asset management fee (e.g. ½% of plan assets); or they can be hidden within the administrative fees deducted by the plan custodian. It is important to understand the types of investment that are purchased within the plan and what the overall expenses of those investment are. In addition, investments come in different classes, so two seemingly identical investments could have different fees depending on their class. These are all things that need to be considered during the benchmarking process.
The plan fiduciary can use the plan’s third party administrator or contract with another third-party to obtain the information necessary to benchmark the plan fees. Depending on the plan fiduciary’s selection for who to provide these services, will dictate what the cost of the benchmarking will be. If you have never benchmarked your plan, you may be surprised how much the plan is actually paying for its investment advice (or lack thereof).
When you benchmark your plan, we suggest that in addition to reviewing the fees charged, you also have the investment alternatives reviewed to determine if they are appropriately performing or if some of the funds should be replaced within the Plan.
Remember, the plan fiduciary is required to act prudently and in the best interest of the plan participants and beneficiaries, it is important that the process for determining the reasonableness of the plan fees is taking place.
Tania Quigley, CPA
Tania Quigley has been a member of Cerini & Associates’ audit and consulting practice area for ten years where she focuses on serving the firms nonprofit and employee benefit plan clientele. Tania has experience in performing financial statement audits and reviews, tax return preparation, cost report preparation and filing, retirement plan audits, and other consulting. Tania brings her expertise, diversified background, and helpful approach to all of her engagements.