Plan Fees

Much public discussion is occurring about fees paid by participants in employer sponsored qualified retirement plans.  Plan fiduciaries must, among other things, ensure that fees levied from plan assets are reasonable with respect to necessary services received.  To assist plan fiduciaries as they execute that duty this article outlines 1) services a plan might receive, 2) concerns when comparing services and their underlying fees, and 3) general considerations about how fees are applied to participant accounts.

To begin, following are many services in which a plan might engage, often with an external provider who may be paid using plan assets:

Day-to-day administrative functions: These functions may include remitting plan contributions, distributing plan funds, processing participant enrollment / change forms and beneficiary forms, participant loan processing, fielding participant requests for information regarding plan provisions / benefits, etc.

Annual administrative functions: These functions may include gathering and summarizing annual employee census information, performing required non-discrimination testing, calculating employer contributions, calculating participant vesting, Form 5500 series reporting, reviewing plan forfeitures and their use, reviewing plan bonding, preparing and / or disseminating periodic benefit statements, summary annual reports and a multitude of other annual (or more frequently) required disclosures to participants, etc.

Other periodic administrative functions: Certain services are likely to be performed on an as-needed basis.  These services may include, Qualified Domestic Relations Order review, analysis of benefits payable to a deceased participant, preparation of company or retirement plan committee minutes memorializing decisions related to retirement plans, consultation regarding plan design, etc.

Financial advisor functions: A financial advisor typically provides investment advice to both plan trustees and participants to whatever degree plan fiduciaries feel it is warranted.  Some but not all act as an additional fiduciary to the plan (but not in place of the plan administrator).

Recordkeeping functions: Maintaining an accounting of plan assets (by participant and source where applicable).  It is common for plans that allow participants to direct their own investments to have access to a website that provides them with their account balance daily; that site is typically maintained by the recordkeeper.

Custodial functions: A plan’s assets must be invested in a custodial account, contract, or other asset bearing the plan’s name.  Often custodial functions (like carrying out purchases and sales) are performed by a bank, brokerage, or mutual fund company.

Trustee functions:  A plan must name at least one trustee who must ensure that use of trust assets complies with the plan and applicable law.  The plan’s trust agreement (often incorporated into the plan document) defines the trustee’s authority over the plan’s assets.

Plan document preparation and maintenance functions:  Every employer sponsored qualified retirement plan must have a written plan and a written trust document (in practice these are often wrapped into one).  As laws change, amendments (and, periodically, entire restatements) are required to incorporate those changes into the plan’s language.  Additional documentation may also be required.

Actuarial services: Required for many of the annual and day-to-day administrative functions of a defined benefit plan, including calculating required IRS minimum and maximum contributions to defined benefit plans, calculating participant benefits at distribution, preparing Schedule SB (or MB) of Form 5500 series annual return, preparing PBGC comprehensive premium payment filings, making annual Adjusted Funding Target Attainment Percentage Certification, etc.

Other valuation services: Depending on the assets held by a plan, an independent party may need to be engaged to value plan assets (for example real estate or privately traded employer stock).

Audit services: Generally plans with participants in excess of 100 participants (and some plans with fewer than 100 participants that do not meet certain requirements) are subject to audit by an independent accounting firm.

Once all required services are identified, plan fiduciaries can compare and contrast the services and the related fees.  Often, as plan fiduciaries set about reviewing the fees of potential service providers, they find comparison between them difficult.  First, each provider may provide varying services from the above list.  Second, even where two service providers purport to provide the same service, the way they deliver those services may vary.  Third, even if two service providers deliver the same service the same way, the structure of their fees might differ.

One easily understood example is processing of participant distributions.  If a service provider is offering this service, will they provide a participant with required disclosures and election forms, then process the forms once the participant returns them, and mail the participant a check?  Or will they only perform some of these steps?  Is this done on-line?  What level of involvement is required by the trustee(s)?  Will the service provider assist in the remittance of any tax withholdings to Treasury?  Prepare the required annual forms reporting the distributions and tax withholdings to the IRS?  How long does each step take to process?  When and how are associated fees charged?

And that is just one of the day-to-day administrative functions to consider.  Clearly, depending on the answers to these questions, the fee charged will vary.  But one size does not fit all.  Plan fiduciaries need to consider the importance of each particular function to the plan.  For example, a plan sponsor with high turnover may wish this function to be as automated as possible, and paying more for such service may be perfectly reasonable.

Once plan fiduciaries vet each service offering and determine that the plan pays reasonable fees (from plan assets) for each, they must consider how each participant account bears those costs.  Are they allocated on a per-capita basis, pro-rata based on account balance, varying dependent upon the investment chosen by participants (where participants may direct their own investments), or some combination of these, and, further, is that methodology fair and reasonable as it affects each employee group / plan participant?

For example, a fee levied per-capita will represent a larger percentage of lower account balances, but an equal dollar value for all participants. Alternatively, a fee levied pro-rata (based on account balance) will result in greater fees in terms of dollars paid for participants with the highest account balances. Finally, where the plan’s investments contain a ‘revenue sharing’ component in their fees, it is relatively common to see inequities in the fees paid by participants depending on the investments each has chosen.

Though not the focus of this article, note that, if your plan is required to provide detailed information about fees to plan participants under the recent ERISA §404(a)(5) disclosures, it has the added requirement of clearly communicating the fees that may be charged each year to participants.  (Anecdotally, DOL is reviewing those disclosures on audit; accuracy is of import.)

In summary, if you are a plan fiduciary and you do not know what services your plan is receiving, who is providing those services, what amount is being paid from plan assets for those services overall, and how each plan participant is allotted those fees, you are likely not adequately performing your fiduciary duty.  You should regularly review this issue of fees paid from plan assets and the underlying services received.  This is no small undertaking, and it is advisable to engage a knowledgeable professional to assist you with these duties if you lack the requisite expertise.

Stephanie L. B. Terry Stephanie L. B. Terryis a senior manager with Pinnacle Plan Design, LLC.

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