Since July 1, 2012, covered service providers have been required to comply with ERISA section 408(b)(2), by providing details of the compensation received both directly and indirectly for the services they deliver. It appeared there was no escape. But as July 2012 came and went, what happened to those disclosures, and more importantly, what did plan sponsors do with the disclosures they received?
Some plan sponsors, eager to check the box that the disclosure was received, may have simply filed the document away and moved on to the next task at hand. There are, however, still some necessary steps. Plan sponsors must fulfill their fiduciary responsibilities; by both filing the disclosure itself and ensuring the services they are receiving are reasonable for the fees being paid.
Plan sponsors need to take three critical steps, as part of a documented fiduciary process regarding the fee disclosures from their covered service providers:
1. Confirm the disclosure is complete and understandable
Your covered service providers must provide you with an understandable and thorough compensation breakdown. While various formats can be used to detail fees, if you can’t do the math or if the fees are unclear, you should ask the provider for clarification.
The disclosed fees need to reflect both direct and indirect fees the service provider receives, including the fees from subcontractors or affiliates of the provider. If you believe your provider is not being forthcoming with their disclosure, or doesn’t provide a new disclosure when their fees change, it is your responsibility to request the clarification. It is important to note that a plan sponsor is responsible for taking action to make sure the disclosure received meets the requirements.
2. Benchmark your fees and services to the marketplace
Once you understand the fees being charged for the services provided, you have the responsibility for making sure the fees are reasonable. Many plan sponsors do this by hiring an outside expert who has knowledge of the marketplace and understands the buying power of plans with characteristics similar to yours.
There are two ways plan sponsors can do a market check of their fees and services. Depending on the state of their current vendor relationship, a Request for Information (RFI) or a Request for Proposal (RFP) should be performed. Either of these methods can be done on a “blind” or a fully disclosed basis: either the vendors need not know it is your company doing the market check, or you can disclose your company’s name to the participating vendors. If the plan sponsor desires to retain the services of their current vendor, then the RFI can be performed. This is a watered-down version of the RFP, whereby you ask vendors to provide their fee proposal for the services they would offer to you and your participants.
Knowing the fee points of other vendors in the marketplace provides two benefits. You will be able to (1) determine whether the fees you are being charged by your current vendor are reasonable, and (2) negotiate, if necessary, with your current provider, with the awareness of your marketplace buying power. Arming yourself with this information is critical to determining the reasonableness of your plan’s fees.
The other approach is an RFP, which is a formal process. It involves providing vendors with a questionnaire to obtain a more in-depth understanding of their services, having the vendors present their capabilities in-person, and then selecting a new vendor for the plan services. Assuming a vendor other than the incumbent is selected, this process ultimately results in a conversion of the entire plan to a new vendor. Given the complexity of this method and the time needed to devote to its successful completion, a plan sponsor will typically only undertake this approach if their current vendor relationship is beyond repair.
3. Establish the frequency with which ongoing reviews will occur
In the fast-paced retirement plan industry the landscape changes rapidly. Competition among vendors has driven fee levels down at a mind boggling speed. Vendors service platforms change quickly to maintain competitiveness and market share. In this environment, a best practice for plan sponsors is to perform a market check either through a RFI or RFP of their fees and services every three to five years. This frequency should be documented to establish your responsibility for looking at your plan fees on a regular basis.
Keep in mind it is not necessary to select the provider with the lowest fee proposal. ERISA states that it is the plan sponsor’s responsibility to ensure that fees are reasonable and necessary for the service provided. A more robust service platform may generate a higher fee level. A plan sponsor must only establish that the fees being paid are reasonable for the services provided.
Conclusion
Following these steps and documenting the actions taken would be prudent for plan sponsors who are looking to fulfill their fiduciary responsibilities regarding fee disclosure...have you done this?
—Patrick Coughlin, Vice President, director of Corporate Retirement Services, Cammack LaRhette Consulting
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.