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:
Request Information from Your Plan
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be outdated.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
Evaluate Cost and Performance Data Specific to Your
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.
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
How much of the firm's analysis focuses on individual fee
components, as opposed to the overall fee structure by service
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
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
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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