A white paper, “DC Fee Management: Mitigating Fiduciary Risk and Maximizing Plan Performance,” from consulting firm Mercer, says DC plan fees are the target of intense scrutiny from legislators and regulators, with lawsuits related to them continuing to grab headlines. At the same time, the Department of Labor’s service provider disclosure requirements signal its intention to enforce the requirement that the compensation paid for service relationships is “reasonable” for plans covered under the Employee Retirement Income Security Act (ERISA).
“The increased demands placed upon administrators of DC plans, combined with the intense focus on fees, calls for greater attention to fee management,” said Amy Reynolds, Mercer’s U.S. Defined Contribution investment leader, based in New York. “Effective fee management will improve retirement outcomes for plan participants, while ensuring that risk is mitigated and plan performance is enhanced for the employer.”
As a result, Mercer has created the following best practices for DC fee management:
- Price administrative fees on a per-participant basis. This approach provides fee transparency and affords fiduciaries a sound basis for documenting the reasonableness of recordkeeping fees.
- Benchmark and negotiate recordkeeping and investment fees separately. This practice ensures each component of the program is appropriately priced.
- Consider both fund vehicle and asset size as plan assets grow and markets evolve. Less expensive alternatives to mutual funds are increasingly available in the marketplace. Recordkeepers need to remember to inform clients of eligibility for such new or lower cost investment vehicles as they become available.
- Benchmark and negotiate recordkeeping and trustee fees at least every other year. This approach allows fiduciaries to document that the plan’s fees are market-competitive.
- Negotiate vendor contracts to ensure service standards and liability provisions are in the best interests of plan participants and beneficiaries. This practice also points out that such standards should be meaningful to the plan sponsor and measureable by the vendor.
- Monitor actual fees paid against contractual requirements. With this practice, plan sponsors’ responsibilities will extend beyond the negotiations to ensure fees charged are commensurate with contracts.
- Review services annually to identify opportunities to reduce administrative costs. This approach considers administrative processes that are inefficient or outdated, plan provisions that can be simplified and streamlined, strategies to promote self-service among participants, and consolidation of legacy plan accounts to reduce plan complexity.
A free copy of the white paper can be requested here.