401(k) fee due diligence

Plan sponsors have an ongoing fiduciary responsibility to ensure that
fees charged for 401(k) plan administration are both necessary and
reasonable; in fact, failing to do so
exposes employers to potential liability.
But, deciphering the administrative
charges from the often complex fee
structures used by record keepers can
be difficult, and when investments are
achieving healthy returns, fee due diligence often flies off the radar. Given the
recent downturn in the markets, retirement plan administrative fees have come
under increased scrutiny from participants, reminding sponsors that they
have an obligation to validate both the
ROI and the competitiveness of the
charges.

“Right now, every dollar matters,” says
Linda Wauson, Retirement Practice Consultant with Watson Wyatt Worldwide.
“If your company is paying too much, it
lowers the rate of return for participants. Plan sponsors should dig deep to
understand the charges, validate the
competitiveness of the fees and document their findings.”

Not infrequently, a review of the fees
reveals participants are paying significantly more than the services should
cost. This can amount to hundreds of
thousands of dollars per year for a large
plan.

Smart Business spoke with Wauson
about what steps plan sponsors should
take to validate the reasonableness of
retirement plan administrative fees.

How are plan administrative fees paid?

Record keepers are typically paid
through a portion of the plan’s investment fund’s expense ratio, called revenue sharing or soft dollars, and through
hard dollar per-participant fees. In addition to receiving revenue sharing
through the investment fund expense
ratio, record keepers can also receive
revenue sharing from the investments
through subtransfer agent fees, per-participant fees based on the number of participants investing in the fund, commissions and yet other fees. Record keepers
often earn the majority of their fees
through revenue sharing. During times
when assets are growing either through
investment returns or new money going
into the plan, such as employee contributions, employer matches and employee rollovers, the revenue sharing also
grows, and these soft costs can get away
from plan sponsors.

What steps should plan sponsors take to
assess the reasonableness of an administrator’s fees?

Annually, plan sponsors should review
what they are paying their record keepers for administrative services by asking
their record keepers to disclose all revenue they’ve received for their services
and explain how the revenue was developed, requesting a separate breakout of
any monies the record keepers received
from revenue sharing.

Add the hard dollar fees and the
revenue sharing together, divide the
total by the number of participants and
compare against the average participant
charges paid by other companies. It’s
important to consider that the following
factors also determine a company’s
administrative charge: the plan’s complexity (such as making deductions from
multiple payrolls or calculating complex
contribution matching formulas), the
total assets under management, the
number of participants and the service
levels your company requires, such as
the number of employee meetings conducted by the record keeper.

At least every two to three years, compare the record keeper’s fees to market
rates for similarly sized plans and service packages. Both HR consulting firms
and record keepers can provide benchmark data for comparison purposes, but
sponsors should also solicit competitive
bids every five to seven years, compare
the findings and then document the
results.

What actions should plan sponsors take if
they find that the plan’s administrative
costs are too high?

Sponsors should review their existing
contracts and negotiate lower fees or
more services from their record keeper.
Another option is to consider lower
share class funds, which will generate
less revenue sharing and provide plan
participants a higher rate of return. If
renegotiation attempts fail, sponsors
should consider initiating a bid process
and find a new record keeper.

Lastly, remember to document your
steps and the results, because sponsors
have the burden of demonstrating that
they have followed a prudent process.
It’s not necessary to have the lowest
rates, but assuring that the charges are
reasonable is a plan sponsor’s fiduciary
responsibility.

LINDA WAUSON is a Retirement Practice Consultant with Watson Wyatt Worldwide. Reach her at [email protected] or
(713) 507-1753.

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