Category Archives: ERISA Compliance

Risk Mitigation Starts with Retaining Demonstrated Experts

by David J. Witz AIF®, GFS™ – February 17, 2014

It is widely understood that a plan sponsor that lacks expertise is obligated to seek the advice of qualified experts to assist them in their fiduciary duties. But to what extent can a plan sponsor rely on their expert’s advice? According to Clark v. Feder Semo and Bard, P.C., No. 12-7092 (D.C. Cir. Jan. 7, 2014), reliance on an expert is consistent with a fiduciary’s obligation to act with loyalty and prudence.  While this case focused on reliance on legal counsel, it provides important direction for both plan sponsors and service providers.   

The suit was filed on behalf of Clark, an attorney/employee/plaintiff, against her employer/law firm for assumptions used when calculating Clark’s distribution upon termination of the retirement plan. Clark argued that the plan’s fiduciaries were not entitled to rely on outside counsel’s advice but instead should have undertaken an “independent investigation.”

The D.C. Circuit ruled in favor of the plan sponsor. According to the court, the plan sponsor:

  1. “Properly” relied on the advice of outside counsel,
  2. Was “reasonably justified under the circumstances” to rely on counsel’s advice,
  3. Made a reasonable decision that any prudent trustee would have made under similar circumstances, and
  4. Made a prudent decision “based on the circumstances at the time of the challenged decision”

The court came to this conclusion based on ERISA’s adoption of the common law’s standard of fiduciary care in Section 404(a)(1)(B) which the court has interpreted to mean a plan sponsor can rely on counsel’s advice in “appropriate circumstances” when making important decisions. In coming to this conclusion, the court relied on several other decisions, including:

  1. Roth v. Sawyer–Cleator Lumber Co., 16 F.3d 915, 918 (8th Cir. 1994);
  2. Howard v. Shay, 100 F.3d 1484, 1489 (9th Cir. 1996);
  3. Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 300–01 (5th Cir. 2000);
  4. Gregg v. Transp. Workers of Am. Int’l, 343 F.3d 833, 841 (6th Cir. 2003).

Important to all covered service providers (CSP) is the court’s conclusions in Clark that reliance on counsel’s (an expert) recommendation was “reasonable” because counsel:

  1. Had expertise in ERISA…the CSP was “qualified”
  2. Had been advising the plan since the 1990s…the CSP was “familiar” with the plan
  3. Had conducted a thorough review of the relevant documents…the CSP was “deliberate”
  4. Made recommendations based on a reasonable investigation…the CSP adopted “procedural prudence”
  5. Documented their recommendations…the CSP adopted “substantive prudence” and
  6. Made recommendations consistent with the plan sponsor’s understanding…the CSP was “collaborative”

Because the plan sponsor’s expert made recommendations based on procedural (process) and substantive (merits) prudence, the court concluded the plan sponsor did not need to conduct any further investigation as claimed by Clark. The moral of this case: there is value in retaining qualified expert CSPs. Unfortunately, many CSPs provide counsel to plan sponsors beyond their education, experience, or skills. There is liability for both the plan sponsor and the CSP in this situation. Plan sponsors should engage in a documented process to select their CSPs and CSPs should provide plan sponsors with validation they are capable of doing the job.

Bottom line, a plan sponsor should trust but verify and a CSP must not misrepresent their expertise. In fact, the court noted that a plan sponsor’s reliance on a CSP would be “improper” if there are “significant reasons to doubt the course counsel suggested.” This suggests that a plan sponsor should not blindly rely on their CSPs in all circumstances especially when they counsel a plan sponsor about issues they lack expertise in. This is when a plan sponsor is obligated to investigate or seek additional experts depending on the circumstances.

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