Written by Allison Brecher, Vestwell’s General Counsel
The recent barrage of litigation and emerging regulations about retirement plan fees have put plan sponsors on heightened alert to make sure the fees incurred by the plan are reasonable and that they are paid properly. It’s a difficult assessment to make, complicated by the broad array of administrative expenses, with confusing terms like back-end load fees, revenue sharing, and 12b-1 fees. It’s hard enough for plan sponsors to understand what fees service providers are charging, much less whether the plan or plan sponsor should pay for them. However, it doesn’t have to be and there are plenty of opportunities for advisors to assist in making things more clear.
Depending on the plan sponsor client’s philosophy, sponsors may want to shift as much of the plan’s costs, like recordkeeping expenses, legal fees, and mutual fund expenses, to the plan and participants. Unfortunately, a plan sponsor can significantly harm the plan, and itself, by doing so without careful analysis.
Where to start?
The plan document may specify whether administrative expenses can be paid by the retirement plan assets. If the document says only the plan sponsor can pay, then the plan must reflect that. Some plans require the plan sponsor to advance the payment and get reimbursed by the plan later, in which case the payment and reimbursement should be made within 60 days in order to avoid a Department of Labor requirement for a loan agreement between the plan and sponsor. If the plan is silent, then analyze DOL regulations to determine if payment by the plan is permissible. Costs relating to plan formation, termination, and design are typically paid by the plan sponsor whereas recordkeeping and investment consulting expenses can be paid by the plan.
The plan can only pay for reasonable expenses – but what is “reasonable”?
This is the central issue in dozens of lawsuits. Participants rely on their plan sponsor to negotiate the best deal with service providers and it therefore becomes the sponsor’s fiduciary duty to make sure the plan is only paying reasonable fees.
Unfortunately, it can be hard to understand all of the direct and indirect compensation paid to plan providers. Sponsors need advisors’ help to ask the right questions. Some expenses, like sales commissions and back-end load fees on mutual funds, are paid out of the assets’ investment returns and therefore charged indirectly to participants. Those charges may not be apparent on participants’ benefit statements. Worse yet, there is no single benchmark for retirement plans to use as a baseline comparison. For this reason, some sponsors prefer to pay for expenses themselves since only plan assets, not corporate assets, are within a regulator’s purview.
Advisors can help sponsors by reviewing the expenses paid by similar plans. All ERISA plans file Form 5500s annually, which are public and should disclose all fees paid by the plan. Making an apples-to-apples comparison can be difficult because some sponsors do not know, and therefore cannot disclose, all indirect compensation. Advisors can also help clients prepare requests for proposals to understand available pricing options, such as flat fees or per participant fees that are more transparent and easier to understand. They can also help evaluate the quality of services, since the DOL acknowledges that cost alone should not be the only determinative factor.
Monitor, monitor, monitor
Sponsors should periodically reevaluate the plan’s fees. Even though a sponsor hires consultants to assist, they remain a fiduciary and must regularly evaluate the changing marketplace. As always, documenting their decision making process is critical. Sponsors must also remember to check whether services are being provided by a party-in-interest and satisfy the prohibited transactions rules.