The scope of this document could be a simple statement that sets forth general guidelines for plan fiduciaries to evaluate and review plan fees, says Sarah Downie, a partner with the law firm Hughes Hubbard & Reed LLP.
Downie says that the statement, in its most basic form, can help a plan sponsor comply with the requirements of the Employee Retirement Income Security Act (ERISA) as well as the fee disclosure regulations. “Or it may be a more elaborate document that helps plan fiduciaries better understand fee allocation among participants and service providers as well as guidelines for evaluation of fees,” Downie tells PLANSPONSOR.
Downie recommends that plan sponsors consider adopting a fee policy statement. “However,” she cautions, “plan fiduciaries should take care to make sure the document does not impose rigid or easily breached standards on plan fiduciaries.” Downie says that one potential risk is that the plan fiduciaries could become the subject of litigation or be unable to act consistent with their fiduciary obligations under ERISA.
Some advisers think the statements are an important piece of the puzzle, for both sponsors and covered service providers. “We include a fee policy statement with all the plans we work with,” says James Holland, director of business development, MillenniuM Investment and Retirement Advisors LLC. Holland tells PLANSPONSOR that 408(b)(2) regulations brought the importance of fee disclosure to the forefront. Formal fee monitoring, however, dates back to the very beginnings of ERISA.
The Department of Labor (DOL) does not specifically require a plan to include such a document, but, Holland says, “I would argue they already have. They didn’t say put a fee policy statement in place, but ERISA says you have to have some sort of written guideline that shows you’re monitoring plan fees. You don’t have to call it that, but you have to have it.” Since ERISA was initiated, he says, the documentation and the idea have been a part of a workplace retirement plan, and they are an important piece.
“You need some kind of guideline in place to show that you’re documenting,” Holland says. The fee policy statement is a linchpin that ensures a plan sponsor can prove that the firm is looking at all the providers who touch the plan. It can be used to show that the services are necessary, and the fees are reasonable, he says.
Advisers and consultants are often engaged to assist plan fiduciaries with understanding plan fees and with creation of this statement, according to Downie. “These providers, as well as legal counsel, may be retained to assist plan fiduciaries with drafting and implementing fee policy statements,” she says. Holland says that fee policy statement can add to an adviser’s credibility. He remarks that he doesn’t see a lot of them, and they can show an adviser who is ahead of the curve.
Fee disclosure regulations have not yet celebrated their second birthday, and the industry is still in an evolutionary period, Holland says. Fee policy statements will likely become more prevalent for several reasons, Holland feels. “A lot of people feel 408(b)(2) didn’t do what it was supposed to do,” he says. “But I think it has. One of the things it has brought about is more people asking questions, so fee policy will become more important. People are going to need to keep track and document fees.”
The use of the title “fee policy statement” has developed post-disclosure, according to Holland, and is now added to the investment policy statement. Fee disclosure regulations helped to push it along, but he says it is not necessarily a DOL initiative. As it is used now, Holland says the fee policy statement is an easy way for plan sponsors and plan fiduciaries to understand all the fees associated with the plan, rather than “some elongated ERISA term.”
Fee policy statements are essential, Holland feels. “You’re talking about participant accounts, and money needs to be accounted for,” he says. “It helps the plan sponsor understand the value that advisers and consultants bring.“ Not every plan fiduciary will see the need for a fee policy statement, Downie says. Those who are satisfied with their current tools for fee management may decide that it is not necessary. But Marcia Wagner, president of The Wagner Law Group, says such a statement can be very helpful to plan sponsors in meeting their fiduciary duty.
“A plan sponsor should explain to participants in advance the 404(a)(5) disclosure regulation and the type of information that will be provided,” Wagner says. A fee policy statement can serve as a reminder that the plan sponsor monitors and stays current with the plan’s costs and keeps participants informed about the complexity of plan costs and fees.