Fee Oversight Must Be Ongoing

No matter the business or service, no one likes paying excessive fees. This is especially true with retirement plans. Participants are setting aside money for retirement, and the last thing they want is to have those precious dollars consumed by fees.

As a retirement plan sponsor you have a fiduciary duty to evaluate plan costs. You are required to carry out your “responsibilities prudently and solely in the interest of the plan’s participants and beneficiaries. Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable,” as explained by the U.S. Department of Labor in Understanding Retirement Plan Fees And Expenses.

The importance of fee oversight was made particularly clear by a recent U.S. Supreme Court ruling.

“Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset,” explains Justice Stephen Breyer in delivering the Court’s opinion. “In short, under trust law, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.”

As the Court’s opinion noted, oversight must be an ongoing process. The DOL points out that “after careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided.”

The DOL also suggests that plan sponsors consider the “cumulative effect” of all plans, since the various investment options and levels of service can amount to significant expenses. Typical fees can include:

• Plan administration – These can be bundled or unbundled, or a combination of both (for instance, two bundled groups). Fees are typically charged to each participant based on their individual account balance or as a flat fee.
• Investment – These indirect charges are not always clear and must be carefully monitored. Most fees are a percentage of assets invested and are deducted from a participant’s return on investment.
• Individual – These fees are usually optional and based on individual investment choices or special circumstances (for example, loan fees).

Regular evaluation of these fees is critical. As part of your ongoing oversight, be sure to include the following key elements:

• Documented decision-making process for evaluating fees for all services
• Clear list of services needed from each provider to accurately account for all fees
• Level of services and options from the plan provider and the associated fees
• Objective plan provider evaluation based on identical service requirements
• Clear compensation details from the plan provider, including any potential conflicts of interest
• Monitoring schedule and process for evaluating the level and quality of the services and fees
• Clear, regular communication about all fees to participants

This final point is particularly important. As the DOL explains: “For plans that allow participants to direct the investments in their accounts, plan and investment information, including information about fees and expenses, must be provided to participants before they can first direct investments and periodically thereafter – primarily on an annual basis, with information on fees and expenses actually paid provided at least quarterly.

“The initial plan related information may be distributed as part of the Summary Plan Description provided when a participant joins the plan as long as it is provided before the participant can first direct investments. The information provided quarterly may be included with the Individual Benefit Statement.”

The opinions voiced in this material are for general information only and are not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or advisor for guidance on your specific situation.