Employers have a lot of freedom to determine how their 401(k) plan fees are allocated. The flip side of that freedom: A tremendous responsibility to make sure everything fee-related is done “solely in the best interest of participants.” That last part has caused plenty of legal issues for employers recently.
At the 2017 Mid-Sized Retirement & Healthcare Plan Management Conference in Phoenix, Kameron Jones, an RFP specialist and investment advisor representative at NFP, spelled out exactly why employers must care about plan fees, making sense of the various types of fees out there and work to determine if their own plan fees are reasonable.
Why should you care?
The first part of the Jones’ presentation — why employers should care about plan fees — included plenty of timely, real-life examples of why it’s critical for employers to make evaluating plan fees a top priority.
Under ERISA, employers — as plan fiduciaries — must ensure that only reasonable expense are being paid by plan participants. This process should be comprehensive, measurable and documented with care, skill, prudence and diligence.
Unfortunately, many firms fall short with the latter part of that equation.
As we’ve reported on, Delta Airlines is one of the most recent examples of an employer that is being held to the fire for failing to have a comprehensive, measurable and well-documented process for evaluating its plan fees.
Of course, Delta is one of many employers having legal problems in this area.
In addition to unfavorable ruling in two highly publicized 401(k) fee cases — Tibble v. Edison and Tussey v. ABB — Jones offered an eye-opening list of employers that have faced or are currently facing 401(k) fee litigation. Here’s just a handful of the firms from Jones’ list:
- Fidelity, and
What is the fee structure?
Before determining if their plan fees are reasonable, employers need to determine certain things about about their plan and its related fees and services and answer a number of critical questions including:
- What am I buying?
- How much does it cost (investment, administrative and advisory services)?
- Who is going to pay (participants and employers)?
- How are they going to pay?
- What model is best for us?
The answer to how the fees will be paid can be especially tricky as their are a number of complex options including variable revenue sharing, level revenue sharing and zero revenue sharing.
Are our fees reasonable?
One of the best ways for employers to safeguard themselves from lawsuits is by understanding, monitoring and documenting all plan fees, services and investments on a regular basis. Employers can do this undergoing a full Request for Proposal (RFP) provider analysis to the marketplace.
This should also be done any time you are unhappy or uncertain about services being delivered by your plan, the fee structure or the investment lineup.
But what exactly is a regular basis?
Jones suggested the following timeline for employers/plan sponsors:
- Once per year: Do a general benchmarking of fees
- Every three years: Roll out a specific benchmarking of fees and investment opportunities to the marketplace, and
- Every six years: Establish and follow a prudent process.