Monday, October 7, 2013

Plan Sponsor Obligations

Plan sponsors have certain obligations to monitor and negotiate fees associated with their 401(k) plans.  Plan sponsors should be able to demonstrate they have undergone a suitability analysis and made a determination that the cost of their plan is reasonable in relation to the value of services received by the plan.  If you have not done this analysis recently, now might be a good time to do it.

Plan cost review:  Plan sponsors need to clearly identify and review all of the various services to the plan and what the plan is paying for such services (including any revenue share from investments).  To do this plan sponsors need answers to the following questions: 
  • What are the different fees and services?  Schedule C of your Plan's most recently filed Form 5500 lists the plan's services providers and, for many service providers, the services provided and the fee paid for the services.  Each service provider's service contract and/or fee disclosure should be reviewed for more specificity.  By knowing who is providing the service, the cost of the service and the source of the fee payments, plan sponsors can begin to get a handle on cost and on whether the cost is reasonable in relation to the service provided.
  • Was a benchmark used to measure reasonableness and is it appropriate?  Were current service providers selected as a result of a vendor search?  Were current service providers' fees compared to other service providers servicing 401(k) plans similar in size to yours?  Knowing the market, service providers and industry tools available to determine the appropriate benchmarks against which you can measure your plan's services and expenses is a must.
  • What conflicts exist, if any, with the plan's service providers?  Plan sponsors often rely primarily on information provided by their service providers as to the reasonableness of services, investment options, and fees.  However, plan sponsors must remember service providers may have a commercial, not a "co-fiduciary", relationship with the plan and, thus, may not be impartial.  Accordingly, it is important to know who shares in direct and indirect revenue from plan assets or receives revenue (from another source) due to a relationship with the plan.  Does the relationship between the payer and payee give them the ability to affect their own compensation or that of an affiliate without your approval?  Did an advisor have a material financial, referral or other relationship or arrangement with a money manager, broker, or other entity that may create a conflict of interest in performing services for your plan? 
  • Are the services provided and their fees the result of due diligence?  Has the plan leveraged its bargaining power, if any, to acquire, when able, lower cost funds or services for the plan?  When was the last time the plan sought a request for proposal ("RFP") to determine what other service providers might provide in terms of services and cost? 
It's still all about the process.  As has always been the case, a plan sponsor's potential liability lies not in the outcome of the decisions made, but in the decision process itself.  Plan sponsors must be prepared to support their internal decision making, especially on matters involving the reasonableness of plan cost. By asking who is providing services, what services they provide, how they are being paid and from where and to whom the money flows, plan sponsors can begin to get a handle on exactly what is the cost of their plan and answer the most important fiduciary question of all, which is not, is the Plan the absolute lowest dollar cost plan on the market, but rather, is the value the plan receives for its cost reasonable.  If it is not reasonable, the plan sponsor must take action to reduce the plan's cost.

The Wagner Law Group is available to assist you with any questions you have regarding retirement and benefit matters, including reviewing plan services and cost or assisting with RFPs to gauge the market position of your plan.