Benchmarking Fees for Optimizing Plan Value

May 3, 2013 ( – Benchmarking plan fees can ultimately optimize the value of an employer’s retirement plan.

In its preamble of the ERISA Section 408(b)(2) service provider disclosure rules, the Department of Labor (DOL) said: “Now, more than ever, it is critical for plan sponsors to understand plan fees.” But, just because information is disclosed does not mean it is understood, noted David de Tagyos, regional consultant with Goldman Sachs Asset Management’s Retirement Services Group, speaking to attendees of the 42nd Annual Retirement & Benefits Management Seminar, sponsored by the Darla Moore School of Management of the University of South Carolina, and co-sponsored by PLANSPONSOR.  

To really understand plan fees, plan sponsors must understand how fees are derived, determine whether fees are reasonable in light of services provided, and demonstrate that a prudent process was followed for service provider and fee decisions, de Tagyos contended. He said it is not enough to look at total plan costs, because many fees make up that number, and while total costs may be in line with the industry normal, the fees for one particular service or provider may be out of whack. In addition, there should be a balance between what the plan pays and what it receives. “408(b)(2) provides the data, and benchmarking provides the scale,” de Tagyos said.  

He added that reasonable value is what the DOL is looking for, not the lowest cost. “If a provider is above average for fees, it should be because it is above average with service,” he stated.

Plan sponsors and advisers should explore new ways to benchmark plan fees, de Tagyos said, noting that traditionally they have requested periodic proposals from different vendors, used databases of Form 5500 filings and used benchmarking produced by the plan provider. He suggested the use of independent, third-party data. In addition, benchmarking should be an “apples-to-apples” comparison of plans similar to the plan sponsor’s with respect to plan size, number of participants, employer industry, employer match and allocation to index funds. “Using two or more sources is an even better measure and documentation of fee reasonableness,” de Tagyos added.  

Benchmarking leads to optimal plan value by helping plan sponsors: 

  • Renegotiate with providers for lower fees; 
  • Identify services that may be unnecessary; 
  • Enhancing the investment lineup; 
  • Improving plan design; and  
  • Providing documentation for a fiduciary audit file. 
“Plan sponsors should work with advisers to utilize the benchmarking capabilities of an independent, third-party specializing in retirement plan fee benchmarking,” de Tagyos concluded.