The recent barrage of litigation and emerging regulations pertaining to retirement plan fees has put 401(k) plan sponsors on heightened alert to ensure their fees are reasonable and paid properly.
It’s hard for sponsors to know if they fulfilled their duties, which are judged in hindsight and complicated by the broad and confusing array of administrative expenses and complex terms like “back-end load” fees, revenue sharing, and 12b-1 fees.
It’s also difficult for plan sponsors to understand what fees service providers are charging, much less whether the plan or the plan sponsor should pay for them.
However, there are plenty of opportunities for advisors to help their clients navigate the murky waters of plan fees.
Depending on the plan sponsor’s philosophy, they may want to shift some of the plan’s costs, like recordkeeping expenses, legal fees, and mutual fund expenses, to the plan and the participants.
Unfortunately, there are significant risks involved, and so this should only be done with careful analysis. Below are a few strategies that can help plan sponsors navigate the costs to the best resource.
Start by examining the plan document as it may specify whether administrative expenses can be paid by the retirement plan assets. If the document says only the employer can pay, then the plan must be amended before the employer can change that.
Some plans require the employer to advance the payment and get reimbursed by the plan later, in which case the payment and reimbursement should be done within 60 days in order to avoid a Department of Labor (DOL) requirement for a loan agreement between the plan and sponsor. If the plan is silent, then analyze DOL regulations to determine if payment by the plan is permissible.
Plan assets can only be used to pay for reasonable expenses—but what is “reasonable?”
This is the central issue in dozens of lawsuits. Participants rely on their employer to negotiate the best deal with service providers and it therefore becomes the sponsor’s fiduciary duty to make sure the plan is only paying reasonable fees.
Unfortunately, it can be difficult to understand all of the direct and indirect compensations paid to plan providers—sponsors need advisors’ help to ask the right questions. Some expenses, like sales commissions and back-end loads on mutual funds, are paid out of the assets’ investment returns and therefore charged indirectly to participants.
Those charges may not be apparent on participants’ benefit statements. Worse yet, there is no single benchmark for retirement plans to use as a baseline comparison. For these reasons, some sponsors prefer to pay for expenses themselves since only plan assets, not corporate assets, are within a regulator’s purview.
Advisors can help sponsors by reviewing the expenses paid by similar plans—all ERISA plans file Form 5500s annually, which are public and should disclose all fees paid by the plan. Making an apples-to-apples comparison can be difficult because some sponsors do not know, and therefore cannot disclose, all indirect compensation.
Advisors can also help clients prepare requests for proposals when comparing different plan providers to understand available pricing options, such as flat fees or per participant fees that are more transparent and easier to understand. They can also help evaluate the quality of services, since the DOL acknowledges that cost alone should not be the only determinative factor.
Sponsors should regularly reevaluate the plan’s fees—even if a sponsor hires an advisor or consultant to assist, they remain a fiduciary and must regularly evaluate the changing marketplace. As always, documenting the decision-making process is critical. Sponsors must always remember to check whether services are being provided by a party-in-interest and satisfy the prohibited transactions rules.
Most of all, ask questions.
When it comes to selecting a new plan, or staying compliant with a current one, it’s always important for plan sponsors to know how much they’re paying, what they’re paying for, and whether the choices they’ve made are in the best interests of their employees.
Either an advisor or a trusted and transparent plan provider can be a huge help in this process. But as with most things, the biggest help is in asking questions and staying informed.
Allison Brecher is general counsel at digital 401k platform Vestwell.
Allison Brecher is the general counsel of Vestwell, a digital retirement platform that streamlines administration and management of retirement plans.
