Opinions April 29, 2021

How to Tell If You’re Paying Reasonable Fees for Actuarial Services

Leslie Olds, with Strategic Benefits Advisors, discusses how DB plan sponsors can determine whether actuarial fees are in line with services provided.

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As a defined benefit (DB) plan sponsor, it can be difficult to determine whether the fees you are paying for actuarial services are reasonable.

These services involve complicated calculations and are subject to the scrutiny and requirements of the IRS, Pension Benefit Guaranty Corporation (PBGC), plan auditors, company auditors and other parties. It’s also hard to anticipate how much effort will be required by the actuary to produce various deliverables—particularly when they involve nonroutine special projects.

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Plan fiduciaries have a responsibility to ensure that fees paid from trust assets are reasonable. This article describes some ways to evaluate whether actuarial fees are in line with the services provided.

Routine vs. Non-Routine Services

First, it’s important to distinguish between the two categories of actuarial services.

Routine services are those required to be performed, for example, under the Internal Revenue Code (IRC) or financial accounting standards. Many routine services occur annually—such as actuarial funding and accounting valuations, annual funding notices, Form 5500 Schedule SB filings, PBGC premium filings, proxy disclosures and plan auditor requests—while others occur on a non-annual basis. These non-annual services include nondiscrimination testing, actuarial experience studies and individual benefit calculations.

Non-routine services are less defined in terms of frequency and scope and may include projects such as pricing plan amendments, union negotiations, pension liability settlements, plan freezes and mergers and acquisitions (M&As).

The nature of routine projects makes it easier to define the hours and resources they require; therefore, they are often priced on a fixed-fee basis. In contrast, non-routine projects are often priced on a time-and-expense basis because they are less defined and more difficult to scope.

Fixed Fees vs. Time-and-Expense Charges

Fixed-fee pricing can be advantageous for plan sponsors because it simplifies budgeting and may reflect a discount off actuaries’ regular hourly rates. Typically billed over a contract period of one or more years, fixed fees may be flat or may increase modestly each year for inflation. The plan sponsor should be able to request the total number of hours and average billing rate required to complete fixed-fee services.

In contrast, time-and-expense charges are variable. These fees are based on the hours spent by individual team members assigned to the project. Hourly billing rates vary depending on the experience and credentials of the particular team member. Even though these fees are not fixed, plan sponsors might be able to negotiate a discount, cap or freeze on the underlying billing rates. A fee estimate should be provided with the explicit understanding that the plan sponsor will be notified in advance if charges will exceed the estimate.

Fee Transparency

Fees for actuarial services are ultimately based on the hours of effort and resources required to complete the work, so even when services are invoiced on a fixed-fee basis, the actuary should be able to provide a breakdown of hours and billing rates by individual or in aggregate. Plan sponsors should expect the hours for routine, fixed-fee services to be weighted toward staff with lower billing rates.

Invoices for non-routine services should always include a breakdown of hours and billing rates by individual team member. Plan sponsors could see higher average billing rates for these services, since more experienced resources are often required to complete these types of projects.

Some actuarial firms charge additional fees, which should be disclosed to the plan sponsor. These fees could include administrative charges for activities such as file storage, copying and mailing. There may also be technology fees to cover the cost of developing and supporting the systems and software used to complete actuarial calculations. These additional fees can be significant, for example 5% to 10% of total fixed fee and time-and-expense charges. Depending on the size of the relationship, plan sponsors might be able to negotiate reducing or eliminating these fees altogether.

Managing and Monitoring Fees

The actuary can assist plan sponsors with managing and monitoring annual fees. For routine services, invoices can include a summary of charges to date against the annual fixed fee. For non-routine services, project charges to date can be included on the invoice along with a comparison to the original fee estimate. For plan sponsors that want to pay permissible fees from trust assets, the actuary can provide a breakdown of trust-payable and non-trust-payable expenses, subject to fiduciary review.

If multiple departments engage the actuary for different services, it might be helpful for the plan sponsor to assign one gatekeeper to monitor actuarial fees across the organization. The gatekeeper can review the overall spending and ensure multiple departments are not engaging the actuary for similar services that could be consolidated. Plan sponsors can also ask their actuary to assist with identifying ways to better manage or reduce fees in the interest of their ongoing relationship.

Independent Evaluation of Actuarial Fees

Plan sponsors may find it challenging to self-evaluate their actuarial fees, or they may simply desire an independent second opinion. An experienced consultant can conduct an actuarial fee review, with or without the actuary’s knowledge, to help plan sponsors prepare for their next service contract renewal.

Alternatively, the plan sponsor can engage an independent consultant to write and issue a request for information (RFI) or a request for proposals (RFP) to several actuarial firms. The consultant would manage the process, get apples-to-apples price quotes and provide the plan sponsor with market competitive pricing that may include fee incentives.

Actuarial services are complex, but by using one of these approaches, plan sponsors will never have to wonder whether plan participants are paying reasonable fees for these important services.

Leslie Olds, FSA [Fellow, Society of Actuaries], EA [Enrolled Actuary], FCA [Fellow, Conference of Consulting Actuaries], MAAA [Member, American Academy of Actuaries], is a senior benefits consultant at Strategic Benefits Advisors, an Atlanta-based, independent, full-service employee benefits consulting firm that solves benefits issues for clients with 500 to 300,000 or more employees. She has more than 30 years’ experience in retirement benefits consulting and administration. She can be reached at info@sba-inc.com.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
Compliance April 28, 2021

Court Decision Emphasizes Need to Ensure Accuracy of Online Communications

In a decision in favor of a plan sponsor and provider, a court took a moment to contemplate whether an online request met the ‘written request’ requirement to claim a violation under ERISA.

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The 9th U.S. Circuit Court of Appeals has handed down a decision in a case that employee benefits attorneys are saying has wider implications for retirement plan sponsors and providers in an increasingly digital environment.

According to the opinion, Northrop Grumman delegated administration of its defined benefit (DB) plan to an administrative committee, which in turn contracted with Hewitt Associates, now known as Alight Solutions, to provide outside administrative services for the plan. One of Hewitt’s responsibilities was to generate statements for plan participants showing what their monthly pension benefit would be when they retired, using participant-entered assumptions.

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The plaintiffs in the case requested these statements in the years leading up to their retirement using an online platform provided by Hewitt, and Hewitt mailed the statements to them on Northrop letterhead. After the plaintiffs retired and began collecting benefits in the amount the statements predicted they would, Northrop sent them notices that the statements generated by the online platform had been incorrect.

The errors in the calculation were discovered in 2016, during a transition to a new recordkeeper. In December 2016, one plaintiff was informed that his monthly retirement benefits would only be $807.89 per month rather than $2,000. In February 2017, the other plaintiff was informed that her monthly retirement benefits would be $823.93 per month rather than $1,600, and that she was required to repay more than $35,000 of the benefit she had already received.

The plaintiffs filed separate lawsuits which were combined into one. They alleged that Hewitt, the committee and Northrop had breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) and that the committee had failed to provide ERISA-required benefit information.

On appeal from the U.S. District Court for the Central District of California, the 9th Circuit agreed with the District Court that the calculation of benefits pursuant to a formula is not a fiduciary function. “We hold that plaintiffs have not alleged that Hewitt was performing a fiduciary function in miscalculating retirement benefits. As a result, Northrop and the committee did not breach a fiduciary duty by failing to ensure that Hewitt correctly calculated plaintiffs’ benefits,” the appellate court opinion states.

The 9th Circuit affirmed the District Court’s dismissal of the plaintiffs’ fiduciary duty claims against Northrop, the committee and Hewitt. “Calculation of pension benefits is a ministerial function that does not have a fiduciary duty attached to it,” the appellate panel said. “Even if Hewitt were a functional fiduciary with respect to some of its actions, it would not have been acting as a fiduciary when performing calculations according to the plan formula.”

Regarding the allegation that the committee had failed to provide ERISA-required benefit information, the District Court found that the plaintiffs did not adequately plead that they submitted “written” requests for pension benefit statements as required to state a claim for violation of ERISA. Although the 9th Circuit held that use of an online platform to request a pension benefit statement can satisfy the “written” request requirement, it upheld the District Court’s dismissal because the complaint did not allege that the online platform request was “written.”

Noting that no circuit has addressed whether a pension benefit estimate request via an online portal is sufficient to constitute a “written request,” the 9th Circuit said the District Court was correct to the extent that the bare allegation that the plaintiffs used an online platform to request a pension benefit estimate does not satisfy the “written request” requirement. However, it also concluded that “the statute does not limit adequate requests to only those written by hand on a piece of paper and conveyed in the postal system. In other words, an adequate electronic writing suffices.”

In an alternative to their ERISA claims, the plaintiffs asserted state-law professional negligence and negligent misrepresentation claims against Hewitt. The appellate court agreed with the District Court’s holding that plaintiffs’ state-law professional negligence and negligent misrepresentation claims were not pre-empted by ERISA because they did not have a “reference to or connection with” an ERISA plan. It said “the state-law negligent misrepresentation claim relates only to the relationship between plaintiffs and Hewitt.”

This would allow the state-law claims to move forward. However, the appellate court noted that the defendants’ briefs include attacks on the merits of the state-law claims, which the District Court did not address, so it remanded the claims back to the District Court for consideration.

In an article, Jackson Lewis attorneys said: “This case has important practical implications for plan fiduciaries and plan recordkeepers and their relationship to each other. These concepts are not limited to pension plans. Electronic systems, portals and online tools are now the primary way employee benefits are offered and administered and need to be closely managed for compliance with the requirements of ERISA and the plan.”

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