Excessive fee lawsuits continue to make headlines. Under the Employee Retirement Income Security Act (ERISA), retirement plan sponsors are required to ensure fees for investments and services are reasonable. But how is a plan sponsor to determine what is reasonable when it comes to fees? The answer: Benchmarking. But there also needs to be a degree of both accuracy and fairness.
Retirement plan best practices recommend benchmarking fees within a frequency of every one to three years. According to a recent Employee Benefit News article, plan sponsors typically use benchmarking as a way to ensure they’re fulfilling their fiduciary obligations. Benchmarking can also identify opportunities for lower possible fees to participants. Excessive fee lawsuits should be avoided at every opportunity to do so. However, Robin Powell, the article’s author, and a benefits consultant with Strategic Benefits Advisors, pointed out that benchmarking is only effective to a point.
The reason is that no two plans are the same. Even plans that are similar in size, in the same industry, are different. According to Ms. Powell, “Variations in plan design, the number and nature of vendors involved. And the size of the plan’s assets all help determine what fees are actually ‘reasonable.’” She went on to note that differences in service levels can play a role in fees, but are seldom included in benchmarking exercises. For example, employers in high-turnover industries may incur higher recordkeeping charges due to a higher volume of enrollments and distributions.
In addition, benchmarking data is often harvested from IRS Form 5500s, which are typically outdated by seven to 19 months, Ms. Powell wrote. RFPs are another source of benchmarking data, and although these may be updated annually, the data within them is also often out of date. Avoiding excessive fee lawsuits is best accomplished by using current data.
Ms. Powell offered three recommendations for plan sponsors to avoid excessive fee lawsuits:
- While RFPs often rely on historical data, plan sponsors should not fear the RFP process. Ms. Powell encourages employers to collect competitive bids by issuing periodic RFPs. However, that doesn’t mean that employers should jump ship on their current vendors if their RFPs reveal they are paying higher fees in specific categories. Instead, they should use those discoveries as a jumping-off point for negotiations with existing providers.
- Plan sponsors should ensure they’re getting what they’re paying for. As the well-known investor Warren Buffett once said, “Price is what you pay. Value is what you get.” Ms. Powell suggested striking a balance between cost and quality by accounting for a service provider’s expertise and track record of success. The lowest-cost provider probably isn’t best, but the highest-cost provider may not be, either.
- Finally, plan sponsors should carefully document that they did their research when it comes to their decision-making processes. As Ms. Powell explained, “All documentation, including emails and call transcripts with consultants and strategic investment advisers, should be retained to demonstrate that the plan sponsor solicited objective, expert input.”