It was recently reported that the Schlichter Bogard law firm filed lawsuits against NYU, MIT, Yale, Duke, Vanderbilt, Johns Hopkins, Emory and Penn on behalf of numerous participants in retirement plans sponsored by the universities. The suits allege, among other things, that the participants were charged excessive fees. Many similar suits have been filed in recent years.
The complaints allege that the universities, as plan sponsors, failed to monitor administrative fees and did not replace expensive, poor-performing investments with cheaper, higher performing ones. Had the plans tailored their investment options and used their bargaining power to cut costs, the complaints argue, participants could have collectively saved tens of millions of dollars.
Plan sponsors need to understand the rules and regulations that govern their conduct in this area. The Federal law governing private-sector retirement plans, the Employee Retirement Income Security Act (ERISA), requires that those responsible for managing retirement plans, referred to as fiduciaries or trustees, carry out their responsibilities prudently and solely in the interest of plan 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. Therein lies the problem. What’s reasonable? It can’t be defined by statute.
Plan fees and expenses are important considerations for all types of retirement plans. As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor the investment options made available to plan participants and beneficiaries, and the persons providing services to your plan. Understanding and evaluating plan fees and expenses is an important part of a fiduciary’s responsibility. This responsibility is ongoing. 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. There has been a dramatic increase in the number of investment options, and in the level and types of services, offered to and by plans in which participants have individual accounts. In determining the appropriate number of investment options and level and type of services for your plan, it is important to understand the nature of the fees and expenses charged. The cumulative effect of fees and expenses can be substantial.
A variety of fees and expenses may affect your retirement plan. The following is a list of some of the fees and expenses typically charged to retirement plans:
- Plan administration fees (recordkeeping, daily valuation, participant directed, accounting, legal and trustee services)
- Mutual fund expense ratios
- Sales charges (loads or commissions)
- Front-end loads, back-end loads, contingent deferred sales charge, or redemption fees
- Asset management charges, investment advisory fees
- 12b-1 fees
- Individual service fees (loans, distributions, etc.)
- Account maintenance fees
Some fees are paid by the plan sponsor and some directly by participants. Most are charged directly against plan assets.
Many non-profits maintain ERISA 403(b) plans, typically through an insurance company variable annuity. In addition to typical mutual funds and guaranteed investment contracts, annuities offer additional benefits, such as an annuity feature, interest and expense guarantees, and death benefits. Each of these additional benefits has associated costs, which can make these contracts costly. Additional costs may include insurance related charges and surrender and transfer charges.
The good news is that while there are other types of expenses, these are the main culprits. At this point we need to address what can be done to evaluate plan fees and expenses. Fees and expenses are just one factor to consider when selecting and monitoring plan service providers and investments. Level and quality of service and investment risk and return should also be considered.
You should begin by establishing an objective decision-making process, one that helps you understand fees and expenses and how they relate to the services to be provided and the investments you are considering.
Before negotiating with prospective providers, consider the specific services you require (e.g., legal, accounting, trustee/custodian, recordkeeping, investment management, investment education or advice), including the types and frequency of reports you wish to receive, communications to participants, meetings for participants, and the frequency of participant investment transfers.
Also consider the level of responsibility you want the prospective service provider to assume, possible extras or customized services you wish to provide, and optional features, such as loans, Internet trading, and telephone transfers.
Once you have a clear idea of your requirements, you are ready to begin receiving proposals from prospective providers. Give all potential providers complete information about your plan and the features you want, so you can make a meaningful comparison. This information should include the number of plan participants and the amount of plan assets as of a specified date.
Service providers should provide information to you about their services and the compensation they require. This information will help you understand the services, assess the reasonableness of the compensation (direct and indirect), and determine if any conflicts of interest exist.
Once you have selected a service provider and investment options, be prepared to monitor their performance to ensure they continue to suit the needs of your employees, arrange to receive information on a regular basis so you can monitor investment returns and service provider performance and, if necessary, make changes. Review any notices received from the service provider concerning changes to their compensation or changes to any other information they provided when hired (or when the contract or arrangement was renewed). And most important, keep in mind that you can retain a pension consultant to benchmark your fees against an average and ensure you are meeting the ERISA fiduciary standard.
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 their 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 participant’s quarterly statement. The investment related information needs to be presented in a format, such as a chart, that allows for a comparison among the plan’s investment options. If you use information from a service provider you rely on in good faith, you will be protected from liability for the completeness and accuracy of the information.
Clearly, serving as a plan fiduciary comes with many responsibilities. As a plan fiduciary, it is your duty to keep plan participants informed concerning all plan fee arrangements, and to understand your liability for failing to provide such information. Benefits 21 LLC, a Friedman LLP company, helps plan fiduciaries address these issues. Contact David Waddington at DWaddington@friedmanllp.com if you have any questions.