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.
