Benchmarking Plan Fees

Fee Benchmarking Best Practices:

  • Request statements of services and fees from your current service providers.
  • Benchmark plan fees to ensure that they are reasonable and competitive using an independent, unbiased third-party.
  • Conduct an annual review of fees and services as part of the plan’s prudent review process.
  • Update the plan’s Investment Policy Statement to include policies and procedures to control and account for administration, recordkeeping and investment expenses.
  • Monitor changes in the quality, frequency and type of services relative to the fees paid by the plan.
  • Maintain a record of annual plan fee reviews in a fiduciary audit file

Annual Limits for 2016

  • Compensation: $265,000
  • Defined Contribution Plan Contribution: $53,000
  • 401(k), 403(b), 457 Salary Deferral: $18,000
  • 401(k), 403(b), 457 Salary Deferral, if 50 or Older: $24,000
  • SIMPLE IRA Deferral: $12,500
  • SIMPLE IRA Deferral, if 50 or Older: $15,500
  • SEP IRA Contribution: $53,000
  • IRA Contribution: $5,500
  • IRA Contribution if 50 or Older: $6,500

Why is Benchmarking Plan Fees Important?

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.

How Do I Go About Benchmarking Plan Fees?

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:

  1. Help plan sponsors meet their fiduciary duties under ERISA
  2. Assess the reasonableness of current fees and services
  3. Make plan sponsors aware of fees paid directly by the company and costs embedded in a plan’s investments
  4. Provide plans with a basis for comparing and negotiating their fees

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).