Do you recall the last time you purchased an automobile? Did you pay retail or did you negotiate for the best deal?
You probably researched the vehicle and armed yourself with information to gain the best price. Chances are that your due diligence paid off and you landed a deal to your satisfaction.
Similar to performing research on the purchase of a vehicle, plan sponsors and fiduciaries of retirement plans have a responsibility, under the Employee Retirement Security Act (ERISA) of 1974, to know the costs charged to their plan and to determine if the costs are reasonable to the level and quality of services provided. Unfortunately, there is no Kelly Blue Book for retirement plans, and many companies struggle to get their arms around the total cost of their plan.
There is a lack of industry standards governing the pricing of retirement plans. Thus, many plan sponsors don’t know what they’re paying, let alone if it’s reasonable. Awareness has increased in light of recent investigations of excessive fees in the mutual fund and insurance industries.
Some industry experts suggest that most plans of 100 to 2,000 participants are paying 20 percent to 40 percent more than they should. As a plan sponsor, it is imperative that you have a working knowledge of fees associated with retirement plans. Plan fees and expenses generally fall into three categories: plan administration fees, investment fees and individual service fees.
Individual service fees are associated with optional services such as loans. They are usually billed to the participant and are of minor concern to the plan sponsor.
Plan administration fees typically cover the day-to-day operations of a plan and generally include services such as record keeping, accounting and legal and trustee services. These fees can be paid explicitly by the employer, or, in some cases, bundled into the investment management fees, making them transparent to plan sponsors and participants. Don’t be fooled into thinking these services are free just because you’re not writing a check for them.
Investment fees are the greatest source of cost in a retirement plan. Studies indicate that more than 70 percent, sometimes as high as 95 percent, of typical plan expenses are tied to investment or asset-related fees. Often, we think of investment fees as simply fund expenses. However, retirement plans are unique in that administrative services, including record keeping and trustee services, may be bundled into the investment fees.
Investment fees can range from as low as 10 or 12 basis points to as high as 300 basis points, depending on the arrangement. Employers should pay particular attention to these fees because they are often deducted from investment returns.
So, how do you know if you have a good deal? As with buying a new car, do your homework. Ask your provider for a written breakdown of all fees associated with your plan or plans. Next, determine if the fees are reasonable by benchmarking your fees relative to competing vendors.
Issue a request for proposal. But keep in mind that cheaper is not always better. An experienced retirement benefits professional knows the market and will take the time to understand what’s important to you.
There are many resources available to you at the Employee Benefits Security Administration Web site at www.dol.gov/ebsa. Tony Petrosino is business development officer at Sky Retirement Services. Reach him at (216) 206-1741.