Consider Who Is Paying When Benchmarking Retirement Plan Fees

Are plan sponsors’ responsibilities for making sure retirement plan fees are reasonable different when the plan sponsor pays versus when plan participants pay?

Emily Costin, a partner at Alston & Bird, says the fundamental thing to understand is that when participants pay the fees, they have to be reasonable, and fiduciaries have to take steps to make sure they are reasonable. “That’s a fiduciary act” under the Employee Retirement Income Security Act (ERISA), she says.

If the plan sponsor pays fees for any services provided to plan out of its own corporate money, that is not a fiduciary act. “Sponsors more likely than not will want to negotiate reasonable fees, but it’s not a fiduciary decision,” Costin says.

Jeffrey M. Petrone, managing director at SageView Advisory Group, says if plan sponsors are paying the administrative fees for the plan, there is no risk. However, this fee arrangement happens more commonly in larger plans. For small- and mid-market plan sponsors, it may be difficult to afford these fees, especially for businesses faced with financial challenges as a result of COVID. Petrone says he believes that in the near future, in response to fee litigation, smaller plans may consider shifting administrative fees to the employer as part of their risk management process.

Sponsors should identify all components of the plan design and administration for which fees are passed to participants and benchmark them against industry standards. “This includes advisory, recordkeeping and investment fees, as well as the fee for the auditor who performs the plan’s financial audit,” Petrone says. “Sponsors need documentation that they have a basis to believe they are using plan assets prudently and fees are reasonable.”

As for a fiduciary best practice process to follow to benchmark fees, Costin says that when putting out a request for proposal (RFP) or benchmarking services for fees, she doesn’t think that would be any different based on who pays. “An RFP is trying to find out what other similarly sized plans are paying for similar services, so when evaluating what a reasonable fee is, plan sponsors should look at the quality of the provider, what services it is delivering, the value of those services and what it is charging similarly sized plans,” she says.

Petrone says, in his opinion, one of the byproducts of fee compression in the defined contribution (DC) plan industry is that providers are seeking to generate revenue in new ways. For example, he says, traditionally in the 403(b) plan market there were not distribution fees, but now more 403(b) providers are charging such fees, because their margins are under pressure.

“Yes, participant transaction fees should be a part of benchmarking,” he says, describing how granular plan sponsors should get when monitoring fees that are paid by plan participants. “It will be meaningful for plan sponsors to look at plan activity in the prior year and see how many participants took loans or hardships, or how many QDROs [qualified domestic relations orders] were processed.” Petrone adds that he has seen situations in which plans were considered high-cost plans because the recordkeeper was structuring fees so that many were coming from participant transactions.

Costin also says plan sponsors should make sure participant transaction fees are similar to what other companies and participants are being charged.

Even if plan sponsors are paying fees themselves, they should spend corporate dollars wisely, Petrone says. No matter who pays the fees, plan sponsors should consider the source of the fee data against which they are benchmarking. “Some databases have gotten better, with an increased number of plans in their universe, but others haven’t,” he says. “I’ve seen significantly different results based on the data set, and how thorough the universe is.”

Costin says there isn’t any one best practice for benchmarking fees; it can be done by a consultant who runs RFPs for other clients and has information on what other plans are paying, or it can be done through a more formal, targeted RFP process. “Plan sponsors should look at what services they want provided and what the associated costs are, and they should make sure they are comparing apples to apples so they can adequately compare companies’ bids,” she says.

Petrone says that while benchmarking is important, he thinks there is no perfect replacement for dong a request for proposals (RFP). “Sponsors will get information that is more specific to their plans and actionable information to either renegotiate or go to another provider,” he says.

“Benchmarking has a role because plan sponsors can’t do an RFP every year,” Petrone adds. “They can benchmark every year to keep an eye especially on how investment expenses compare and show they are doing their due diligence.”

It is important for plan sponsors to look at the actual language in their plan document and what it says in terms of who is going to pay for fees. “They should query whether it is clear what participants will pay for versus what the sponsor will pay for, and make sure that is considered when negotiating for the most reasonable fee,” Costin says.