Department of Labor regulations that went into effect in January of 2009 demonstrated one clear message: 403(b) plans are no longer avoiding the scrutiny of the federal government. Because an increasingly strict regulatory environment in the 403(b) arena heightens the importance of fiduciary oversight, all plan sponsors must ensure that they fully understand their responsibilities.
Some 403(b) plan sponsors believe that if they are exempt from ERISA, they cannot be held accountable as an acting-fiduciary. This is a misconception. While it is true that ERISAs mandated fiduciary duties do not govern ERISA-exempt plans, many state laws impose fiduciary standards similar to those of ERISA, and the escalation of regulatory pressures only underscores the accountability of the fiduciary. Therefore, all 403(b) plan sponsors, whether ERISA-exempt or not, should take care to understand and meet their fiduciary responsibilities.
As a fiduciary, you are charged with acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. One of the most important duties of a fiduciary is to understand and evaluate the fees of their organizations retirement plan services. Fees matter because of the impact they have on the balance of the participants retirement assets.
To illustrate, let us compare the effects of paying a 1.5% fee to those paying a 0.75% fee over the span of 25 years. Consider an example of a 40-year-old participant who has an account balance of $100,000 in 2013, adds an annual contribution of $1,000, and expects an annual 5% investment return. By the age of 65, this individual would receive about $275,270 if he paid the higher fee and just over $345,100 if he paid the lower fee. Since higher fees result in lower account balances, fiduciaries are responsible for ensuring that participants are not paying unnecessary or unreasonable costs.
In order to address the cost of the retirement plans, you must have a thorough grasp of the fees and expenses involved. Doing so can be quite challenging because fee structure is not particularly transparent in the 403(b) arena: plans usually consist of several layers of fees that are often difficult to detect. To complicate matters further, some service providers charge plan sponsors directly, while others charge fees indirectly by billing plan participants through investment offerings.
Despite the complexity, fiduciaries must understand, manage, and control all plan fees. In the last decade, we have seen increased fee-related legal activity in the 401(k) arena, where participants have filed class-action lawsuits against their employers over excessive 401(k) fees (e.g. Winnett, et al. v. Caterpillar, Inc.; Spano, et al. v. Boeing Co.). With a fee-conscious approach trend in the 401(k) retirement space, it is prudent for the fiduciaries of 403(b) plans to take action now and address the costs of their retirement plans.
The challenges surrounding fees, expenses and benchmarking may seem overwhelming, especially since one of the major hurdles in the 403(b) arena is the shortage of data available to plan sponsors. Fiduciaries can, however, compare services and evaluate plan prices by issuing an RFP, hiring a consultant, and reviewing third-party data. A consistent and sincere effort to address the reasonableness of both plan- and investment-related fees should benefit both the sponsors and the participants in 403(b) plans.
Mike Swallow is senior vice president and senior retirement plan consultant for CBIZ Retirement Plan Services. He can be reached at MSwallow@cbiz.com.
