Fees and expenses associated with the management of a qualified retirement plan have become a central issue with lawmakers, regulators and the courts. Plan sponsors have a fiduciary responsibility under ERISA to determine if the fees paid by a plan to its service providers are reasonable and necessary. Since 2006, more than two dozen large 401k plan sponsors have been hit by class action lawsuits alleging that they breached their fiduciary duty to control and account for investment-related fees and expenses.
Determining the reasonableness or “fair market value” of plan fees is part art (qualitative) and part science (quantitative). It includes identifying and comparing the cost of operating the plan to the real or perceived value of the persons or organization(s) servicing the plan. It is important to note that ERISA does not require a plan sponsor to select the service provider or the investment options with the lowest cost. The Department of Labor has stated that fees are not the only factor to consider when comparing plan providers.
It is not enough for a plan sponsor simply to know who has been compensated from plan assets; the plan sponsor also has a duty to demonstrate that a determination was made as to why the compensation being received by a service provider is fair and reasonable for the level of services being rendered. As in any transaction, the fair price relates to the value of the service being provided. Consequently, it can be reasonable to pay higher fees if a plan is receiving more or superior services. A plan sponsor is required to be able to demonstrate that a plan’s fees and expenses are “appropriate and reasonable” given the goals and objectives of the plan and the needs of the plan participants.
The first step in evaluating whether a plan’s fees are reasonable is comparing the cost of a particular plan to the costs of a group of similar plans. While it can be argued that there are many variables to consider and that no two plans are identical, benchmarking the cost of your plan is necessary and beneficial, in order to:
Usually, a plan with standard plan features, more assets and higher account balances will incur fewer expenses than a plan with a similar number of participants but less assets and lower average participant account balances.
It is a plan sponsor’s fiduciary duty to control and account for plan and investment-related fees and expenses. The fee benchmarking report that follows is a useful tool for helping plan sponsors understand how a plan’s costs compare to a peer group of plans of a similar size. It is not intended to make value judgments on the quality of the services being provided. Rather, it is an important and necessary first step toward evaluating a plan’s costs in accordance with ERISA Section 408(b)(2).