Benefits May 3, 2013

Benchmarking Fees for Optimizing Plan Value

May 3, 2013 (PLANSPONSOR.com) – Benchmarking plan fees can ultimately optimize the value of an employer’s retirement plan.
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In its preamble of the ERISA Section 408(b)(2) service provider disclosure rules, the Department of Labor (DOL) said: “Now, more than ever, it is critical for plan sponsors to understand plan fees.” But, just because information is disclosed does not mean it is understood, noted David de Tagyos, regional consultant with Goldman Sachs Asset Management’s Retirement Services Group, speaking to attendees of the 42nd Annual Retirement & Benefits Management Seminar, sponsored by the Darla Moore School of Management of the University of South Carolina, and co-sponsored by PLANSPONSOR.  

To really understand plan fees, plan sponsors must understand how fees are derived, determine whether fees are reasonable in light of services provided, and demonstrate that a prudent process was followed for service provider and fee decisions, de Tagyos contended. He said it is not enough to look at total plan costs, because many fees make up that number, and while total costs may be in line with the industry normal, the fees for one particular service or provider may be out of whack. In addition, there should be a balance between what the plan pays and what it receives. “408(b)(2) provides the data, and benchmarking provides the scale,” de Tagyos said.  

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He added that reasonable value is what the DOL is looking for, not the lowest cost. “If a provider is above average for fees, it should be because it is above average with service,” he stated.

Plan sponsors and advisers should explore new ways to benchmark plan fees, de Tagyos said, noting that traditionally they have requested periodic proposals from different vendors, used databases of Form 5500 filings and used benchmarking produced by the plan provider. He suggested the use of independent, third-party data. In addition, benchmarking should be an “apples-to-apples” comparison of plans similar to the plan sponsor’s with respect to plan size, number of participants, employer industry, employer match and allocation to index funds. “Using two or more sources is an even better measure and documentation of fee reasonableness,” de Tagyos added.  

Benchmarking leads to optimal plan value by helping plan sponsors: 

  • Renegotiate with providers for lower fees; 
  • Identify services that may be unnecessary; 
  • Enhancing the investment lineup; 
  • Improving plan design; and  
  • Providing documentation for a fiduciary audit file. 
“Plan sponsors should work with advisers to utilize the benchmarking capabilities of an independent, third-party specializing in retirement plan fee benchmarking,” de Tagyos concluded.
Benefits May 3, 2013

Pension Reform Bill Heads to Illinois Senate

May 3, 2013 (PLANSPONSOR.com) – A comprehensive pension reform bill narrowly passed the Illinois House of Representatives this week, according to an article in the State Journal-Register.
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Sponsored by Illinois House Speaker Michael Madigan, the bill passed the House on May 2 by a bipartisan vote of 62 to 51. It has now been sent to the Illinois State Senate where, the article notes, similar reforms were voted against in March.

Highlights of the pension reform bill include: 

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  • Calls for pension plans to be fully funded by 2044;
  • A mechanism to force the state to make its pension contributions;
  • Capping the salary on which a pension can be earned at $109,971. The cap will increase annually by one-half of the consumer price index;
  • Capping the amount of pension benefit on which a cost of living adjustment (COLA) can be earned. The formula allows for $1,000 of pension benefit per year of service for those not covered by Social Security and $800 per year of service for those for those who get Social Security. A retiree with 30 years of service would qualify for a COLA on $30,000 of pension benefit;
  • Retirees younger than age 67 would have COLAs halted till they reach age 67 or till they have been retired for five years;
  • Employee contributions would increase by 1% on July 1, 2013 and another 1% on July 1, 2014;
  • After 2019, $1 billion a year that is needed now to pay pension bonds will be used instead to pay down the pension debt. The bonds will have been retired by then;
  • Prohibiting employers with participants in state-funded retirement systems from collectively bargaining pension benefits;
  • The changes applying to state workers, university employees, downstate teachers and lawmakers but not to judges; and
  • The plan not shifting the cost of downstate teacher pensions to local school districts.

Pat Quinn, governor of Illinois, who considered the vote as progress, said, “With the passage of this comprehensive pension reform solution, Illinois is closer than ever to addressing a decades-long problem that is plaguing our economy, our bond rating and the future of our children.”

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