As a defined benefit (DB) plan sponsor, it can be difficult to determine whether the fees you are paying for actuarial services are reasonable.
These services involve complicated calculations and are subject to the scrutiny and requirements of the IRS, Pension Benefit Guaranty Corporation (PBGC), plan auditors, company auditors and other parties. It’s also hard to anticipate how much effort will be required by the actuary to produce various deliverables—particularly when they involve nonroutine special projects.
Plan fiduciaries have a responsibility to ensure that fees paid from trust assets are reasonable. This article describes some ways to evaluate whether actuarial fees are in line with the services provided.
Routine vs. Non-Routine Services
First, it’s important to distinguish between the two categories of actuarial services.
Routine services are those required to be performed, for example, under the Internal Revenue Code (IRC) or financial accounting standards. Many routine services occur annually—such as actuarial funding and accounting valuations, annual funding notices, Form 5500 Schedule SB filings, PBGC premium filings, proxy disclosures and plan auditor requests—while others occur on a non-annual basis. These non-annual services include nondiscrimination testing, actuarial experience studies and individual benefit calculations.
Non-routine services are less defined in terms of frequency and scope and may include projects such as pricing plan amendments, union negotiations, pension liability settlements, plan freezes and mergers and acquisitions (M&As).
The nature of routine projects makes it easier to define the hours and resources they require; therefore, they are often priced on a fixed-fee basis. In contrast, non-routine projects are often priced on a time-and-expense basis because they are less defined and more difficult to scope.
Fixed Fees vs. Time-and-Expense Charges
Fixed-fee pricing can be advantageous for plan sponsors because it simplifies budgeting and may reflect a discount off actuaries’ regular hourly rates. Typically billed over a contract period of one or more years, fixed fees may be flat or may increase modestly each year for inflation. The plan sponsor should be able to request the total number of hours and average billing rate required to complete fixed-fee services.
In contrast, time-and-expense charges are variable. These fees are based on the hours spent by individual team members assigned to the project. Hourly billing rates vary depending on the experience and credentials of the particular team member. Even though these fees are not fixed, plan sponsors might be able to negotiate a discount, cap or freeze on the underlying billing rates. A fee estimate should be provided with the explicit understanding that the plan sponsor will be notified in advance if charges will exceed the estimate.
Fees for actuarial services are ultimately based on the hours of effort and resources required to complete the work, so even when services are invoiced on a fixed-fee basis, the actuary should be able to provide a breakdown of hours and billing rates by individual or in aggregate. Plan sponsors should expect the hours for routine, fixed-fee services to be weighted toward staff with lower billing rates.
Invoices for non-routine services should always include a breakdown of hours and billing rates by individual team member. Plan sponsors could see higher average billing rates for these services, since more experienced resources are often required to complete these types of projects.
Some actuarial firms charge additional fees, which should be disclosed to the plan sponsor. These fees could include administrative charges for activities such as file storage, copying and mailing. There may also be technology fees to cover the cost of developing and supporting the systems and software used to complete actuarial calculations. These additional fees can be significant, for example 5% to 10% of total fixed fee and time-and-expense charges. Depending on the size of the relationship, plan sponsors might be able to negotiate reducing or eliminating these fees altogether.
Managing and Monitoring Fees
The actuary can assist plan sponsors with managing and monitoring annual fees. For routine services, invoices can include a summary of charges to date against the annual fixed fee. For non-routine services, project charges to date can be included on the invoice along with a comparison to the original fee estimate. For plan sponsors that want to pay permissible fees from trust assets, the actuary can provide a breakdown of trust-payable and non-trust-payable expenses, subject to fiduciary review.
If multiple departments engage the actuary for different services, it might be helpful for the plan sponsor to assign one gatekeeper to monitor actuarial fees across the organization. The gatekeeper can review the overall spending and ensure multiple departments are not engaging the actuary for similar services that could be consolidated. Plan sponsors can also ask their actuary to assist with identifying ways to better manage or reduce fees in the interest of their ongoing relationship.
Independent Evaluation of Actuarial Fees
Plan sponsors may find it challenging to self-evaluate their actuarial fees, or they may simply desire an independent second opinion. An experienced consultant can conduct an actuarial fee review, with or without the actuary’s knowledge, to help plan sponsors prepare for their next service contract renewal.
Alternatively, the plan sponsor can engage an independent consultant to write and issue a request for information (RFI) or a request for proposals (RFP) to several actuarial firms. The consultant would manage the process, get apples-to-apples price quotes and provide the plan sponsor with market competitive pricing that may include fee incentives.
Actuarial services are complex, but by using one of these approaches, plan sponsors will never have to wonder whether plan participants are paying reasonable fees for these important services.
Leslie Olds, FSA [Fellow, Society of Actuaries], EA [Enrolled Actuary], FCA [Fellow, Conference of Consulting Actuaries], MAAA [Member, American Academy of Actuaries], is a senior benefits consultant at Strategic Benefits Advisors, an Atlanta-based, independent, full-service employee benefits consulting firm that solves benefits issues for clients with 500 to 300,000 or more employees. She has more than 30 years’ experience in retirement benefits consulting and administration. She can be reached at firstname.lastname@example.org.
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