Category Archives: 408b2

Benchmarking – All About that Fee

Stealing a tag line from the new hit song “All About That Bass” this blog post outlines a practical approach to benchmarking fees in a manner that complies with ERISA 408(b)(2) fee disclosure. As you may recall, ERISA 408(b)(2) is designed to provide a responsible plan fiduciary (“RPF”) with sufficient information to determine if fees are reasonable and conflicts are avoided.

In general, the information a covered service provider (“CSP”) is obligated to provide a RPF includes their fiduciary status, a description of their services, and the fees charged for those services. This information provides the foundation for preparing a quantitative fee benchmarking assessment. Once this information is in hand, it can be loaded into a benchmarking database to run a comparative assessment. Databases with information on many different plans are better than ones that represent a single service provider platform.

For the results to be reliable, the plan must be benchmarked against other plans that are similar in size by plan assets and participant count. The more similar, the more accurate the benchmarking results. It is also best practices for a quantitative assessment to be accompanied by a subjective qualitative analysis from the perspective of the RPF. Complex plans with size advantages may be better off using benchmarking combined with a formal request for proposal (“RFP”) process to validate fee reasonableness.

The depth of your benchmarking report will impact your ability to draw reasonable conclusions about fee reasonableness. Failure to comprehensively consider services rendered, who pays for those services, and how those services are paid are all material elements of sound benchmarking. Taking short cuts in the collection and evaluation of pertinent data, subjects benchmarking results to criticism the process was imprudent. In short, this is one process that cannot be taken lightly.

However, implementing a proper process with appropriate documentation to support fiduciary procedural prudence protects both the plan sponsor and the CSP by preventing a plan from paying unreasonable fees and protecting a CSP from receiving less than reasonable fees for services rendered.

If you would like further information on how to ensure a retirement plan is paying reasonable fees or how to benchmark a plan’s fees, call or email me at 704-699-7031 or jwitz@fraplantools.com.

Can a Covered Service Provider Assess Their Own Services and Fees under 408(b)(2)?

With the launch of our new custom 408(b)(2) checklists, we’ve received numerous inquires as to whether it is proper for a Covered Service Provider (CSP) of a plan to assess their own services and fees under 408(b)(2). We think this a very interesting question as to which there is no definitive guidance from the Department of Labor (DOL). With no specific DOL prohibition, we conclude that a CSP is free to provide an “initial assessment” of their fees and services to a Responsible Plan Fiduciary (RPF) as long as the substance and the spirit of the 408(b)(2) regulations and other ERISA fiduciary duties are followed. However, a RPF must ultimately be the one to who signs off on the “final assessment.”

What do we mean by initial and final assessment? An initial assessment would be the process of gathering all of the information necessary to make a determination whether 408(b)(2) has been complied with. This involves collecting a CSP’s disclosure, service agreement, and reviewing for compliance issues. The final assessment involves a review of this compiled information, as well as making the ultimate fiduciary decision of whether 408(b)(2) is satisfied.

The following considerations lead us to our conclusion:

Fiduciary Considerations

The first consideration is that 408(b)(2) specifically requires a RPF of a plan to assess whether a CSP’s fees are reasonable and services necessary. A RFP is defined as a fiduciary with authority to cause the covered plan to enter into, or extend or renew, the contract or arrangement. In all reasonable circumstances, this will never include the CSP. Thus it follows that the RPF must be the one who takes the ultimate responsibility for the assessment.

The second consideration is that a prudent fiduciary under ERISA is required to seek out assistance in areas that they themselves lack expertise. This is primarily the reason for the vast expansion of services provided by ERISA 3(21) investment advisors.  Thus, it follows that it is consistent with prudent behavior for a RPF to seek help with their 408(b)(2) obligations at the initial assessment phase, if they feel they do not have the expertise.

The third consideration is that a prudent fiduciary under ERISA is also required to ensure that a plan pay only reasonable fees. If a RPF concludes that it is proper for a 408(b)(2) assessment to be paid from plan assets (which there has been no guidance on but one can easily make the argument that it falls in line with other expenses that have been approved by the DOL to be paid from plan assets), then the RPF has an obligation to ensure the fees are reasonable. It follows that a plan CSP already has an intimate knowledge of the plan, and presumably they are helping to assess the other CSPs of the plan, so there are economies of scale to be leveraged here by using them.

The fourth and final consideration is ERISA’s loyalty requirements and the duty to avoid conflicts of interest. Whether a plan CSP is used to assess its own fees and services or an independent firm is used, the RPF must ultimately sign off on the findings of necessity and reasonableness. Given that 408(b)(2) only allows the RPF to do this and the personal liability at stake, it is not proper for the RPF to just “skim and sign” an assessment put in front of them, even if prepared by an independent firm. The RPF cannot delegate the process of getting involved and making a decision. Thus, the RPF’s heightened involvement by definition eliminates any conflict from a plan CSP initially assessing their own fees and services because the RPF will itself make an independent examination, even if they get help in initially preparing needed information.

Conclusion

When prudent and loyal considerations are observed, we believe that a plan CSP can help conduct an assessment of its own services and fees under 408(b)(2) as long as the RPF is the final authority that determines whether the results of the assessment prove fees are reasonable for services rendered and that disclosures are complete in comparison to the regulations. If the RPF concludes they lack the necessary expertise, plan CSPs that assist the RPF offer a value added service that provides the RPF both time and cost efficiencies.

Are These Fees Unreasonable? – Part 3 of 3 – Recordkeeping Fees

In the final post in our series entitled “Are These Fees Unreasonable?” we address Recordkeeping Fees. (For the two previous posts, see Are These Fees Unreasonable? – Part 1 of 3 – Inv. Advisory Services and Are These Fees Unreasonable? – Part 2 of 3 – Inv. Management Fees)

To recap, FRA PlanTools offers a Benchmarking Report through its web based PlanTools Risk Management System. The report benchmarks the fees paid by a retirement plan for the services rendered against other plans of similar size by plan assets or participant count using a proprietary, independent and objective database.

As a service to the industry for the purpose of starting or continuing the conversation about fees, we are publishing our internal data for the 95th percentile of fees entered into our system for (1) Investment Advisory Services, (2) Investment Management Fees, and (3) Recordkeeping Fees. What this means is that 95% of the retirement plans in our system pay at or less than the amounts found in the charts below. The data was pulled from our system on June 30, 2013.

I think this chart is especially relevant this week with the proposed settlement in the excessive fee case filed against International Paper. One of the allegations there was that the plan overpaid for recordkeeping by $58 million because it was paying $112 a head rather than $52. But how/why does this apply to a plan with less than $10 million in assets? Because the fiduciary duties are the same. Regardless of the size of the plan, the fiduciaries have an obligation to ensure that the fees paid from plan assets are reasonable. One of the most cost effective ways to do that is through benchmarking. Bottom line: if your plan or a plan that you service is paying anything close to the numbers below, it is time to grab the bull by the horns and figure out why.

Click here to download the infographic in PDF form: FRA PlanTools – Are These Fees Unreasonable – Part 3 – Recordkeeping Fees.

FRA PlanTools - Are These Fees Unreasonable - Part 3 - Recordkeeping Fees

 

Are These Fees Unreasonable? – Part 2 of 3 – Inv. Management Fees

This week in our continuing series entitled “Are These Fees Unreasonable?” we address Investment Management Fees. (For last week’s post, see Are These Fees Unreasonable? – Part 1 of 3 – Inv. Advisory Services)

To recap, FRA PlanTools offers a Benchmarking Report through its web based PlanTools Risk Management System. The report benchmarks the fees paid by a retirement plan for the services rendered against other plans of similar size by plan assets or participant count using a proprietary, independent and objective database.

As a service to the industry for the purpose of starting or continuing the conversation about fees, we are publishing our internal data for the 95th percentile of fees entered into our system for (1) Investment Advisory Services, (2) Investment Management Fees, and (3) Recordkeeping Fees. What this means is that 95% of the retirement plans in our system pay at or less than the amounts found in the charts below. The data was pulled from our system on June 30, 2013.

What is challenging about benchmarking Investment Management Fees, and admittedly makes a chart below by definition incomplete, is properly taking revenue sharing into consideration. Revenue sharing is addressed in different ways by different plans (i.e. no revenue sharing at all, reimbursement to participants, crediting to ERISA accounts, offsets, etc…) There is no single right answer when it comes to revenue sharing. At a minimum,  plan fiduciaries must understand the amount of revenue sharing, who is paying it, who is receiving it, and why they are receiving it. It is perfectly acceptable to have revenue sharing pay for necessary services, as long as the total compensation paid to any service provider is reasonable and the plan fiduciary actually negotiates its receipt.

What makes this an especially challenging task is that mutual fund complexes negotiate different revenue sharing amounts with different platforms. They may pay 35 bps to one, but only 25 bps to others. It is our position that it is consistent with prudent behavior by a fiduciary to engage in a process to compare the revenue sharing available from a plan’s fund lineup across different platforms. This is necessary to make sure that if a plan uses investment options with revenue sharing, it is maximizing the benefit to the plan participants.

To our knowledge, a module contained in our PlanTools Risk Management System is the only product in the industry that can perform this comparison automatically through a web based solution. To date, we have revenue sharing information from over 20 different platforms. By way of example, I used the solution to create the following chart that was included in a written fee reasonableness opinion I provided to an advisor for one of their plans based on the fund lineup:

RevSharingChart

As you can see, our data suggests that the plan may be able to increase the revenue sharing for the benefit of the plan with the same plan lineup by either changing platforms or negotiating for additional revenue sharing.

We will finish out the series next Thursday, October 3, when we publish 95th percentile charts for Recordkeeping Fees.

Click here to download the infographic in PDF form: FRA PlanTools – Are These Fees Unreasonable – Part 2 – Inv Mgmt Fees.

FRA PlanTools - Are These Fees Unreasonable - Part 2 - Inv Mgmt Fees

 

Are These Fees Unreasonable? – Part 1 of 3 – Inv. Advisory Services

What makes a fee reasonable or unreasonable? As we all know, there is no definitive guidance provided by ERISA and the Department of Labor. Instead, we are left to make the determination based upon the facts and circumstances at hand.

As many of you are aware, FRA PlanTools offers a Benchmarking Report through its web based PlanTools Risk Management System. The report benchmarks the fees paid by a retirement plan for the services rendered against other plans of similar size by plan assets or participant count using a proprietary, independent and objective database. (We also are about to roll out a new iPad APP called PLANbenchmark to be debuted at the CFDD Conference in San Antonio in October. More on that in a later post.)

As a service to the industry for the purpose of starting or continuing the conversation about fees, we are publishing our internal data for the 95th percentile of fees entered into our system for (1) Investment Advisory Services, (2) Investment Management Fees, and (3) Recordkeeping Fees. What this means is that 95% of the retirement plans in our system pay at or less than the amounts found in the charts below.

The data was pulled from our system on June 30, 2013. As a lead up to the CFDD Conference, we intend to publish Part 2 – Investment Manage Fees next Thursday, September 26, and Part 3 – Recordkeeping Fees on October 3. If we receive positive feedback, we intend to update these charts on a quarterly or semi-annual basis.

Click here to download the infographic in PDF form: FRA PlanTools – Are These Fees Unreasonable – Part 1 — Advisory Services.

FRA PlanTools - Are These Fees Unreasonable - Part 1 -- Advisory Services