As the plan sponsor, you need to be aware of your fiduciary responsibilities when it comes to your company retirement plan. Doing what’s in the best interest of your employees includes things like eliminating conflicts of interest, providing a plan that has a diverse selection of investments, monitoring all of the service providers involved with your plan (financial adviser, record-keeper, third party administrator, etc.), and keeping the plan fees reasonably low, just to name a few. It’s a lot of work to implement a company retirement plan, but it can be a huge benefit when done correctly.
The fiduciary topic that receives the most attention has to do with plan fees. Whether the fees are paid for at the plan sponsor level, the participant level, or shared between the two, plan fees do exist. Some fees exist in the form of a hard-dollar cost, where you receive an actual bill for the service. They can also exist in the form of soft-dollar cost, where instead of receiving an actual bill, they are simply deducted from the plan assets. Soft-dollar billing is quite common with retirement plans because it’s the most difficult to follow. You’d be surprised at the number of people I speak with, at the corporate level, that tell me they don’t pay any plan fees. This is soft-dollar billing at its finest. Plan fees exist with every retirement plan, the trick in many cases is uncovering those fees.
The more somebody has to pay for plan investments, plan service, or plan administration, the lower the returns will be. After all, the fees to cover the cost of a retirement plan have to come from somewhere. In an effort to help make the plan fee issue a bit clearer, in 2012 the Department of Labor (DOL) required that all plan service providers that expect to be a fiduciary to an ERISA plan, disclose their fiduciary status, along with a description of their services and fees. This plan document is known as 408(b)(2) Fee Disclosure document and its purpose is to give employers, and other plan fiduciaries, all of the necessary information to:
- Assess the reasonableness of fees charged directly or indirectly by a service provider and paid out to both that vendor and any affiliates or subcontractors;
- Identify any potential conflicts of interest; and
- Satisfy fiduciary reporting duties and disclosure agreements.
There’s no question that higher fees erode the overall return on a 401k plan. Using the 408(b)(2) Fee Disclosure document should help you determine exactly what you are paying to each of your plan service providers. All you have to do is ask your plan record-keeper or your financial adviser to provide you a copy of the document.
The retirement plan industry is no different than most industries when we say, “nothing comes for free”. Fees can be applied to your plan at the administration level by either your TPA and/or your Record-keeper, fees can be applied to your plan at the participant accounts level by your TPA and/or Record-keeper, and fees can be applied directly to the mutual fund investments by your Record-keeper and/or your financial adviser. As you can see, there are a number of ways fees can be applied to a retirement plan, but the bottom line remains the same, the higher the fees-the lower the returns.
Our main objective, and hopefully yours as well, is to be sure that you are providing the most cost efficient, performance driven, retirement plan that you can. That is exactly what we want, that’s exactly what you should want, and that’s exactly what your employees expect. This is why we perform an annual plan review meeting with the plan sponsor, and or the entire fiduciary committee. At our plan review meeting, we evaluate the plan investments, the plan performance, latest trends within the industry, and fee benchmarking. We disclose every fee within the plan so that it can be discussed and evaluated.
Since it is relatively easy to hide fees within the plan, we always approach the fee discussion with complete transparency. Using the 408(b)(2) Fee Disclosure document, we will show you exactly what you are paying each of the plan service providers. We realize that most people have a tough time asking the fee question, so we prefer to come right out and show you what you are paying. It’s much easier to develop a trusting relationship with your financial adviser if the adviser comes out and explains exactly what you are paying.
If you are a plan sponsor, or maybe you are a member of a fiduciary committee for a company retirement plan, be sure to ask for your copy of the 408(b)(2) Fee Disclosure document. This document is the key to understanding exactly what you are paying. Once you have this, you can then go out and get proposals from other plan providers to see how your plan fees compare. It truly is the right thing to do.