Well, this is certainly worth a look. Vanguard is out with a new whitepaper for 401(k) plan sponsors on determining the reasonableness of fees.
The investment behemoth notes that fees paid for retirement plan investments and services have always been an important consideration for ERISA fiduciaries. However, in recent years these fees have come under increased scrutiny because of litigation, Department of Labor (DOL) regulations, and congressional hearings.
“Under section 408(b)(2) of ERISA, covered service providers are required to identify all plan services and disclose all direct and indirect compensation received in connection with the plan,” the paper explains. “While plan sponsors undoubtedly benefit from receiving more comprehensive and more uniform disclosures, many sponsors wonder what it all means for them. Specifically, they ask what they should do with the fee information once they have it. Most plan sponsors understand they have a fiduciary duty to ensure that plan fees are reasonable, but they repeatedly ask how to determine
- Prudence: The prudence standard requires plan fiduciaries to follow a prudent process. The law places great emphasis on how fiduciaries reach their decisions, rather than on the results of those decisions viewed in hindsight. Procedural prudence dictates that a plan sponsor consider all relevant information and then make a reasonable decision in light of such information.
- Reasonableness: Whether a plan’s fees are reasonable depends upon the facts and circumstances relevant to that plan. The plan sponsor must obtain and consider the relevant information and then make a determination supported by that information. There can be no absolute statements about what is reasonable. For this reason, the DOL and courts generally defer to plan sponsors who follow a prudent process and who can demonstrate the rationale for their decisions.
”Despite all the recent attention on fees, the requirement to ensure the reasonableness of plan fees is nothing new,” it adds. “As a result, over the years plan sponsors and service providers have developed widely recognized tools and methodologies for analyzing plan fees.
“These range from the most used (periodic reviews of fee disclosure reports) to the most comprehensive and costly (requests for proposal, or RFPs). There is no one-size-fits-all approach, and each of the tools and methodologies has pros and cons that should be considered depending upon a plan’s unique facts and circumstances.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
