Plan Fee Benchmarking

Key Fiduciary Considerations When Reviewing Plan Fees

Are the services your plan receives reasonably priced? Knowing the answer is a vital fiduciary duty. ERISA expects more from plan fiduciaries than simply shopping around for plan providers offering rock bottom rates. Rather, the question redirects to whether fees are reasonable in light of services provided. So, in addition to knowing how much the plan is paying, you must determine whether the level of service rendered is appropriate.

Benchmarking in Three Steps

The benchmarking process itself — like all other substantive actions involving the plan — is subject to fiduciary standards. You’ll need to use an objective and systematic process. The following three steps will help you benchmark your providers:

  1. Request information from your plan service providers. Information obtained when you originally chose the provider could be outdated. Request that the provider update general information that describes their qualifications and all fees. Keep in mind that any changes in plan fees are required to be disclosed to the plan prior to the effective date of the changes.
  2. Evaluate cost and performance data specific to your plan. Carefully review your current service agreements and compare it to services being rendered. Are there any gaps? Pay close attention to the routine services originally agreed to, as well as contingencies (e.g., how much liability does your administrator assume for any errors? Does the provider have a disaster recovery plan that includes backup of the plan’s data?)
  3. Collect and assess comparative data. For ERISA compliance, some plans may send out requests for proposals and compare. However, if your plan is relatively small and your request form is long, you might find that not as many service providers will be willing to undergo the process, as you would need to accumulate enough data for a valid benchmark. That’s where it might make sense to utilize professional benchmarking services. They generally have data that can help make the comparisons.

Whether you hire a professional benchmarking service to manage the process depends on your own level of confidence with your ability to do a thorough job, and whether you have sufficient time to do it. The decision of whether to outsource the benchmarking process is an important one and should be well thought out. ERISA’s “prudent man” standard applies in this situation. It’s not prudent to undertake a benchmarking process if you don’t have the knowledge and time to do the job right.

Choosing a Benchmarking Service

If the decision is to use an external benchmarking service, here are some questions to consider during the selection process:

  • What are the technical qualifications of the principals of the firm, and how long have they been in business?
  • How many clients does the firm provide this service to?
  • How broad is the scope of the analysis — does it include all investment management, as well as administrative service fees?
  • How much of the firm’s analysis focuses on individual fee components, as opposed to the overall fee structure by service category?
  • Does the firm obtain fee data directly from the service providers, or through a third-party data provider?
  • What quality control procedures are in place to ensure the data’s accuracy?

Upon completion of the benchmarking process, you may find that some or all of your current service providers are good options. In some cases, you might conclude that, although the fees you’re currently paying are competitive, the list of services included in your current provider’s standard service agreement is not as robust as other providers.

Also, if you conclude that your current provider’s fees are not competitive, that doesn’t necessarily mean you need to switch vendors. This process creates an opportunity to renegotiate your agreement with your current vendor.

Take the Time

Given recent publicity and litigation around this topic, as well as increased ERISA fee disclosure requirements, the probability that you’re dramatically overpaying plan fees is somewhat lower than it might have been in the past. Nevertheless, it’s generally recommended that you benchmark fees every two or three years.

 


Sidebar: Tips on Helping Preretirees Prepare for Retirement

A recent survey of retirees and workers approaching retirement has generated a set of recommendations for employers to help employees have a successful retirement. The Current State of Retirement report by the Transamerica Center for Retirement Studies gives several suggestions for ways employers can help current plan participants ease into retirement.

 

The report encourages employers to allow workers to phase into retirement with flexible work arrangements and reduced hours. Another idea is for employers to extend retirement plan eligibility to part-time workers. In addition, offer preretirees access to financial counseling that includes retirement income strategies. Explain the need for a backup plan if the employee is forced into retirement sooner than expected.

 

Employees find it helpful when employers provide education about Medicare and social security claiming strategies to help them make informed decisions about when and how to apply to maximize the value of their benefits. Finally, encourage preretirees to participate in the selection, training and mentoring of the employee or employees who will assume their responsibilities when they retire.

 

© 2016

 

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