In 2006, Jerry Schlichter, a St. Louis plaintiff lawyer, began suing 401(k) fiduciaries. His contention was that retirement plan fiduciaries were not properly overseeing their plans – particularly the duty to make sure fees were “prudent and reasonable.”
Since then, Schlichter Bogart and Denton have secured more than $330 million in settlements from companies and fiduciaries. Now, more than ever, the spotlight is on plan fiduciaries to make sure their fees are reasonable, prudent and properly disclosed.
Understanding Typical 401(k) Plan Fees
Generally, there are four sources of fees included in retirement plans:
1. Investment Fees
Simply the cost of the investments offered in the plan – usually called “expense ratios”. Other service providers commonly add their fees into this number, which can make it difficult to figure out who is getting paid what, from where and why. It’s your job as a fiduciary to know those answers.
2. Advisor Fees
Often, this is an asset under management (AUM) fee, though there may be revenue sharing with the investments offered in the plan (See the revenue sharing explanation below). The advisor services should be considered when evaluating the reasonableness of their fee.
3. Recordkeeper Fees
This provider maintains the website, sends participants their statements and is where retirement contributions are sent. Their fees can be charged on a per participant basis or as an AUM charge. The recordkeeper may also charge custody fees for the custody platform they are using.
4. Third Party Administrator Fees
This company maintains the trust document, completes the compliance testing and tax filings (Form 5500) that plans must complete annually. They may be bundled with the recordkeeper and can charge an AUM or per participant fee.
Because service providers often aren’t fiduciaries, they may obscure fees by having revenue sharing agreements between each other. Revenue sharing is when an investment collects compensation and passes it along to another service provider like the advisor or recordkeeper. 12(b)-1 fees are the most common type. These types of payments aren’t a breach of fiduciary duty onto themselves, but plan fiduciaries should understand when and how those payments are happening and for what reason.
How “Reasonable Fees” Are Defined
According to ERISA Law, which governs retirement plans, fiduciaries have a duty to make sure fees are reasonable for the services provided. The key phrase here is “for the services provided.” ERISA law does not say fiduciaries have to use the cheapest options for investments, advisors or recordkeepers.
Fiduciaries must understand both what fees are being paid to providers, either directly or through revenue sharing, and what services a provider is offering. If a provider is offering more services and value, it is reasonable for that service provider to charge more.
For example, if your advisor is serving as a 3(38) Investment Manager, it is reasonable that they would charge more for their services than a 3(21) Co-Fiduciary. Fiduciaries should know the difference and which designation their advisor is operating under.
Do Your Fees Qualify as Reasonable?
Because of revenue sharing agreements, a provider may appear low-cost on the surface, but in reality be receiving much higher fees in another area. For example, if your recordkeeper is also a fund manager for investments offered in a plan they may be getting paid reasonable recordkeeper fees, while making money on investments that they own in the plan lineup. That’s why it’s so important to analyze fees on both an “all-in” basis and at the individual service provider level.
Plan sponsors should review fees, services and industry averages annually and execute a full independent benchmarking report every two to three years. These types of reports help you understand how the fees you’re paying, and the services you’re receiving, compare to industry averages. At Plancorp we utilize an outside, independent provider to analyze our clients’ fees and services provided within their retirement plan.
If you don’t have a clear understanding of what fees you are paying, what services are being offered to your participants and how those fees compare to industry averages, that should be at the top of your to-do list. If you would like Plancorp to review your plan fees and help sort out this often-confusing landscape, please reach out to Matt Baisden at firstname.lastname@example.org or (636) 532-7824.