One of the most important aspects of being a fiduciary on a defined contribution (DC) plan like a 401k or 403b plan is to make sure that fees paid to 3rd parties to help run the plan are reasonable. DOL regs effective 2012 required these 3rd parties to disclose their fees to clients. We asked Colin Clark at Washington Financial Group the best process for plan fiduciaries and when a full request for proposal (RFP) makes sense rather than just a fee benchmarking exercise.
The first step in determining whether fees are reasonable is figuring out what they are which can be difficult at times with indirect payments through revenue sharing. Then you must determine if fees are reasonable by comparing them to similar plans receiving similar services. Though theoretically all vendors should be benchmarked, the three main providers include:
- Record keepers
- Investment managers
- Plan advisors
Clark suggests that all three should be benchmarked annually with investments even more frequently. Record keeper pricing is based on the number of participants, assets and account balances so Washington Financial recommends a full RFP to clients if any of these factors change but at least every three years anyway. The RFP gives a more accurate picture of what the market will bear but it does not mean that the plan has to change providers – it might just mean a reduction in fees or service upgrade.
There has been and continues to be massive consolidation of DC record keepers so any major purchase or sale by a plan’s provider would certainly be cause to conduct an RFP or at least watch carefully for disruptions in service.
Documentation for the fiduciary fee is an essential part of this process to show the DOL or even courts with the growing number of lawsuits that a prudent process has been conducted. Remember that cheapest pricing is not required – just reasonable. Most of Washington Financial Group’s clients are under a full service arrangement so the cost of benchmarking and RFP is included, typical in the smaller market, but there are situations when advisors are hired for a fee to conduct either process.
Regardless, make sure that your plan has conducted periodic benchmarking and RFPs for all three providers with a careful eye to the plan’s default option which is usually a target date fund.
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