United States: Fiduciary Duties: Reviewing & Benchmarking Plan Fees

Are the services your plan receives reasonably priced? Knowing the answer is a vital fiduciary duty. ERISA expects more from plan fiduciaries than simply shopping around for plan providers offering rock bottom rates. Rather, the question turns to whether fees are reasonable in light of services provided. So, in addition to knowing how much the plan is paying, you must determine whether the level of service rendered is appropriate. Below are some key areas all fiduciaries must consider when benchmarking costs of their qualified retirement plan.

Benchmarking in Three Steps

The benchmarking process itself, like all other substantive actions involving the plan, is subject to fiduciary standards. You will need to use an objective and systematic process. The following three steps will help you benchmark your providers:

  1. Request Information from Your Plan Providers
    Information obtained when you originally chose the provider could be outdated. Request the latest general information available from your plan providers that describes their qualifications and all fees. It is also important to remember that any changes in plan fees are required to be disclosed to the plan in advance of the changes.
  2. Evaluate Cost and Performance Data Specific to Your Plan
    Reread the fine print on your current service agreements and reconcile it to services rendered. Are there any gaps? Look for them in routine services and in contingencies. For example, how much liability does your administrator assume for any errors? What are the provider's backup capabilities in the event of some kind of disaster? Understanding your service agreements will better help you assess your plan fees.
  3. Collect and Assess Comparative Data
    For ERISA compliance, it is recommended that you send out requests for proposals to other vendors. However, if your plan is relatively small and your request form is long, you might find that not as many service providers will be willing to undergo the process as you would need to get enough data for a valid benchmark. Sometimes, simply picking up the phone and calling a few of the large vendors to discuss fees they charge may be the easiest and most efficient way to create a starting point on where your plan fees stand in comparison to the marketplace.

While conducting a quick search may give you a starting point, hiring a professional benchmarking services can give you the data to help make a thorough comparison. Whether you hire a professional benchmarking service to manage the process depends on your own comfort level with doing a thorough job, and whether you have the time to do it. The decision of whether to outsource the benchmarking process should not be made lightly. ERISA's "prudent man" standard applies in this situation: It's not prudent to undertake a benchmarking process if you do not have the expertise to do the job correctly.

Choosing a Benchmarking Service

If you opt to use an external benchmarking service, here are some questions to ask in the selection process:

  • What are the technical qualifications of the principals of the firm, and how long have they been in business?
  • How broad is the scope of the analysis — does it include all investment management as well as administrative service fees?
  • How much of the firm's analysis focuses on individual fee components, as opposed to the overall fee structure by service category?
  • Does the firm obtain fee data directly from the service providers, or through a third-party data provider?
  • What quality control procedures are in place to ensure the data's accuracy?

When you have completed the benchmarking process, you may find that your current service providers are the best option. In some cases, you might conclude that, although the fees you are currently paying are competitive, they might not cover important services that another service provider includes in its standard service agreement.

Also, if you conclude that your current provider's fees are lacking, that does not necessarily mean you need to switch vendors. Even though you are being charged a higher fee, you may conclude that it is reasonable, given the services you receive. The benchmarking process also opens the door to renegotiating your agreement with your current vendor.

Take the Time

Given recent publicity and litigation around this topic, and increased ERISA fee disclosure requirements, the probability that you are dramatically overpaying plan fees is lower than it might have been in the past. Nevertheless, it is generally recommended that you benchmark your fees every two or three years.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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