Fees have been a focal point of recent retirement plan litigation, for good reason. Small percentage differences, over time, can eat away at participant nest eggs.
Because of the frequency of excessive fee lawsuits, it is imperative that you employ best practices related to retirement plan fees. That means taking the time to develop a documented procedure on how you will help ensure that plan fees are kept reasonable.
Here’s a few tips.
Tip 1. First, know exactly what you are paying.
One challenge to fee review and benchmarking is the complexity of some fee arrangements. The financial services industry historically is notorious for hidden and confusing fees, so as the plan sponsor you need to be crystal clear on how all plan provider fee arrangements work. If you don’t understand this to the letter, you could be putting you and your organization at risk. That’s why it is always recommended to hire service providers who have transparent, easy-to-understand fee schedules. There’s just too much at stake to not require that.
That also means speaking up. If existing plan service providers give you fee schedules that are not clean and clear, ask for a different structure. Or just look for other firms who will provide easy to understand fee schedules.
Tip 2. Make sure all fees are reasonable and necessary
Along with knowing the fees the plan and participants are paying, you also are required to ensure that the services you are purchasing for the plan are necessary and reasonable. If they are not providing a very specific and needed benefit, you should probably revisit if they are appropriate. The last thing you want is an attorney finding expenses paid year after year that are optional.
Remember, as plan sponsor you are serving as a fiduciary for your plan participants. They are counting on you to spend plan money very carefully. That means every expense should be justified. There is no room for extras that don’t provide a measurable benefit to the participant.
What about extras that make your job as plan sponsor easier? Remember, as a fiduciary, you are legally required to put the participant’s interest first. Always make decisions keeping that factor in mind.
Tip 3. Benchmark Everything Regularly
Once you are clear on the above, now you need to make sure you’re getting good value for the plan and participants. The way you can do that most effectively is through benchmarking.
With benchmarking, you periodically compare your fees against the fees of similar plans. That way, you can see if the fees that your plan and your participants are paying are more than what others pay. You can then use that information to negotiate better prices with service providers.
This is good news for participants, of course.
Tip 4. Use the RFI (Request for Information) Process
One of the best ways to benchmark is to periodically engage in something called the “request for information” process. For most plans, every three to five years is a good interval for this. More often and you may end up losing effectiveness.
This process keeps the retirement plan market competitive. In most cases plan sponsors simply opt to remain with their existing provider, but the RFI process allows them to negotiate a better deal.
If you have a full-service retirement plan advisor, they can help you with this process. At Capital Research + Consulting, we normally do this every three years for our clients.
Things to keep in mind
While fees are critical, don’t lose sight of the need for experience and the right knowledge as well. Newer entrants to the retirement plan industry might price lower to gain new clients, but that may expose your plan to someone’s learning curve.
As a fiduciary, you want to make the best decisions possible for your participants, so the fees should always be balanced with the need to hire an experienced provider with the right expertise.
Download our Free EBook for More Tips
For more tips on minimizing your liability as a retirement plan sponsor, download our FREE ebook today:
- Learn about your role as a retirement plan fiduciary
- Action steps you can take to identify any areas where you need to do more
- How to identify and implement best practices
As potential risks rise, make sure your organization is prepared. Invest a few minutes today to make sure you are doing all you can to prevent problems in the future.