Making sure you are paying reasonable fees for your 401(k) plan is one of your major fiduciary responsibilities as a plan sponsor — especially if you are using plan assets to pay those fees. The Department of Labor does not mandate that you pay the lowest possible fees. However, it does require that the fees you pay are reasonable if you are paying them with plan assets. Unfortunately, the DOL does not define “reasonable” fees.
There are a number of methods you can use to determine fee reasonableness. They include:
· Contacting providers to request a fee estimate.
· Benchmarking your plan.
· Issuing a Request For Information (RFI) to service providers.
· Sharing a Request For Proposal (RFP) with providers.
I don’t think you need to issue an RFI or RFP every year to effectively monitor your plan’s fees. Based upon guidance from the DOL, you should conduct an RFI or RFP process every three to five years for the providers you work with. That said, it’s clear that plan sponsors need to continually monitor costs.
Following is a list of fee best practices I’ve developed over my 30-year career working with retirement plan sponsors. Although I can’t promise that you will achieve absolute fiduciary fee compliance by following these suggestions, not following them will probably get you into trouble.
1. Use lowest-cost share classes
Regardless of whether your company is paying fees or you are using plan assets, you should make sure that the share class you are using for every mutual fund offered in your 401(k) plan is the lowest-cost share class available. You don't have to be an expert on mutual fund share classes. Ask your investment advisor to perform this analysis for each set of performance reports produced.
Most plan sponsors who have been involved in litigation related to high fees have failed to monitor this simple factor and as a result offered higher-cost share classes in their plans. Ask your investment advisor at each investment committee meeting whether you are using the lowest-cost share class for each fund and record your advisor's response in your meeting minutes.
There should be no confusion regarding “reasonable” fees for your mutual fund investment options. The answer is simple: Use the lowest-cost share class available.
2. Make sure you offer the right investment options
If you don’t offer a set of index funds in your 401(k) plan now, you probably should seriously consider doing so. Although there is no requirement that you include them, many participants feel that it is the best and most cost-effective way to invest. And frankly, not offering them can make your investment lineup appear expensive.
Although the majority of the fee best practices shared here are compliance related, you can't forget that the most important audience you are serving with your 401(k) plan is your employees. Make sure your plan offers a variety of index options. Asset classes covered should include fixed income, equities and international.
In addition, if you work with a recordkeeper that is a bank or insurance company, it likely has the ability to offer collective investment trust funds that may be lower in cost compared with similar mutual fund options. Make sure you ask your investment advisor to check into the availability of these options.
3. Perform an annual investment fund review
Plan sponsors should review the investment costs and performance of their investment options at least annually. Regardless of how big or small your 401(k) plan is, if you are not conducting an annual review of investment fees and performance, you are probably committing a fiduciary breach.
Make sure you remember to file the reports that outline your review in your plan files. This documents your due diligence.
4. Evaluate service provider fees each year
Although it is not necessary to conduct an RFI or RFP every year for your service providers, you should evaluate their fees each year and discuss your evaluation process in an investment committee meeting. Make sure you record these discussions in your meeting minutes.
The providers you evaluate should include your investment advisor, recordkeeper, trustee, custodian, auditor, educational services provider and any other organization that provides services to your plan.
I believe you may satisfy the evaluation requirement by comparing your provider fees to survey or benchmark data for like-size plans. In some years, when survey data may not be available, you may wish to ask your investment advisor to help you benchmark plan costs.
You may also reach out to providers and get a ballpark estimate of what they would charge to work with your plan. Put notes of your phone conversations and all related emails in your plan files as evidence of your due diligence.
Again, the challenge is to determine whether the costs you are paying are reasonable in comparison. I tend to define reasonable as "in the ballpark."
5. Consider replacing an advisor with an investment adviser
There is no question that investment advisors working for banks, brokerage firms and insurance companies can provide conflicted advice. This advice is estimated to cost investors at least 50 basis points per year.
If you work with an investment advisor, you should consider the benefits of working with an investment adviser employed by a RIA firm. Investment advisers working for RIAs are required to provide advice that is in their clients’ best interest. Investment advisors are not.
6. Distribute required fee notices
Although it is likely that very few participants read them, fee-related notices need to be distributed to your participants each year. Your recordkeeper should take responsibility for making you aware of these notices and preparing them for you. Note that if the notices are not distributed, you are on the hook as the plan sponsor.
7. Seek balance in all things
Don’t let fees be the primary driver of your provider decision-making process. You should prioritize the participant experience above all other considerations. Participants include the services and features available as well as employer contributions when they assess the value of their retirement benefit package.
I have talked with a number of employers who use the lowest-cost providers and funds for their 401(k) plans. They feel it is the easiest way to ensure absolute fiduciary fee compliance. As you might imagine, their employees don’t place a high value on their retirement benefit.
I don’t believe the DOL expects you to spend a ton of time every year grinding through an analysis of your fees. However, you should be able to demonstrate what you did each year to make sure the fees you are paying are reasonable.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC.
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