Retirement plan fee litigation has heightened plan sponsors’ interest in their fiduciary responsibilities regarding fees, noted Michael Sasso, partner and co-founder of Portfolio Evaluations, Inc.

So far, the litigation has targeted large-market plan sponsors, but Sasso feels it will naturally trickle down to smaller plans, he told attendees of the Plan Sponsor Council of America (PSCA) 69th Annual Conference.

Michael Olah, managing principal at Michael J. Olah & Associates LLC, added that he has heard a lot of talk that retirement plan sponsors are not going to settle lawsuits anymore and will force trial. “The risk to the industry is that opinions will come down as judgements which will become precedent,” he said.

Olah expects litigation may be coming about why large plans pay less than small plans—why providers are not leveraging technology to reduce administrative fees. He also said the Department of Labor’s (DOL’s) fiduciary rule may spark litigation about adviser fees, especially if plan participants share in the cost. And, Olah anticipates more target-date fund (TDF) legislation coming out of the fee focus, especially about the use of recordkeeper’s proprietary TDFs or TDFs that use only one fund family.

Retirement plan sponsors need to know what choices they have in pricing models and how to pay for plan fees in order to make the best decisions. Jean Martone, director of the Retirement Plans Group at Portfolio Evaluations, Inc., explains there is a “bundled” pricing model in which the retirement plan provider collects all revenue sharing from the plan’s investment options, and a targeted required revenue for it to keep to pay for costs may be recommended to the plan sponsor. She said the pros of this model is the provider will assume the risk in down markets and not charge the plan sponsor, and the plan sponsor will not incur hard dollar fees if the revenue target is not met due to participant behavior.

However, Martone noted that there is a move away from this pricing model to other models. With a “basis point” model, the plan provider sets a revenue requirement as a percentage of plan assets. With a “per participant” model, the provider sets a per participant fee. With these models, the plan sponsor gets any excess revenue generated and has the option to use this to create an account to help with eligible plan expenses or to rebate the excess to plan participants. “This is the shift in the industry,” she said.

NEXT: Paying for plan administration, and fee equalization

Once a pricing model is selected or determined, the plan sponsor must consider how to pay for plan administration costs. Still the most common method, according to Martone is to use revenue sharing, but there is a movement to try to eliminate revenue sharing now because historically, the cost to participants has been unequal—some are invested in higher expense funds and some in lower or no expense funds. “Plan sponsors are trying to find funds with no revenue sharing, but that is difficult to do, so there may be some combination of revenue sharing and a charge to participants to pay for plan costs.

If they are able to eliminate revenue sharing, plan sponsors can charge participants a basis point or flat fee, or the plan sponsor can pay all plan costs itself. The latter option is not very common, but it is being discussed more, according to Martone.

Martone noted that DOL rules require that fees be reasonable for services provided. Some plan sponsors use databases to benchmark their fees, but if they do, they should understand the methodology and make sure the database is updated regularly, Martone said. Another way to benchmark fees is to issue a request for information (RFI). “Look at all fees—loan origination, loan maintenance, mailing of notices, etc.,” she added. Best practice is to perform periodic reviews that are properly documented.

Investment fees are the largest component of 401(k) costs, so plan sponsors should make sure the fees are reasonable given the size of assets in the investments.

Martone pointed out that the Employee Retirement Income Security Act (ERISA) contains no provisions specifically addressing how plan fees may be allocated across plan participants; however, the DOL says the decision is a fiduciary duty and plan sponsors must react prudently.

There has been a move to fee equalization, which Martone said is defined differently by different providers. “If you want everyone to pay the same fee, the best way is to eliminate revenue sharing and use basis points or a per-participant fee,” she told conference attendees. “But, the plan may have a great fund that still uses revenue sharing.”

Plan sponsors should make sure fee transparency provided by service providers deliver the necessary information to determine the starting point; discuss what equalization methods are available from the recordkeeper; work with the recordkeeper and/or a consultant to frame the communication to plan participants; and document every decision.