A strategically designed fee review process can help you evaluate the information you receive and make a determination on reasonableness and value. These six steps can help you build a solid fee review process that can guide you through the post-disclosure landscape and help make the best decisions for your plan.
STEP 1: FORMALIZE YOUR FEE POLICY
A fee policy is crucial for creating a fee review process. A fee policy outlines the reasoning and methodology used for fee-related decisions within your plan. A fee policy also shows fiduciary prudence and due diligence. It can also help control plan costs and maintain consistency for future committee members. Customize Your Fee Policy There are many ways to customize your fee policy.
Here are some examples and questions to consider when creating your fee policy:
- How did you arrive at your plan fee structure?
- How are fee-related decisions documented?
- How do fees impact participants’ accounts?
- How are plan service providers paid?
- How is plan revenue sharing managed?
- How do plan fee offsets work?
- Participant fee communication process
- What’s your participant inquiry process?
- What type of information and follow-up do you provide?
STEP 2: INVENTORY FEES AND THE SERVICES PROVIDED
Evaluating plan fees requires you to understand the services you are receiving and the costs associated with each of them. Here are some guidelines for taking inventory and understanding your fees and services provided:
- Ensure each covered service provider has listed and defined the services being provided and the amount you are paying for those services in the disclosures provided to you.
- Investigate whether you have received all of the services listed.
- Review all disclosures to identify any discrepancies or conflicts of interest.
- Familiarize yourself with all direct and indirect fee arrangements and compensation, such as revenue sharing, float arrangements, and advisory costs.
- Understand any investment-related fees passed on to participants.
- Document any action items and specific time frame for addressing any issues
STEP 3: EVALUATE FEES VERSUS SERVICES PROVIDED
Plan fiduciaries must ensure services and fees are balanced. Here is an example of how you can structure your evaluation once you have completed your inventory list:
Remember: Fees are important, however, ERISA does not require plan sponsors to select the lowest fee provider. Focus on overall value, experience and service. You should have confidence your provider is servicing both the plan and participants well.
STEP 4: DEVELOP A BENCHMARKING STRATEGY
Although not a fiduciary requirement, benchmarking a retirement plan gives fiduciaries a clear understanding of how their plan compares with others of a similar size and/or type. Benchmarking helps measure the fees you are paying and make a determination on whether those fees are reasonable.
HOW OFTEN SHOULD YOU BENCHMARK YOUR PLAN?
General rule of thumb:
- 100 employees or less: every 2–3 years
- 101–1000+ employees: every 1–2 years
When establishing a benchmarking strategy, best practice is to use a quantitative and qualitative benchmarking approach with information from outside sources.
Quantitative: Industry standards and peer averages for all fees
Qualitative: Your defined success factors, e.g., plan outcomes
Examples of Common Benchmark Criteria:
- Investments and investment expenses
- Administrative expenses
- Participation rate
- Contribution rates
- Maximizing company match
- Utilization of goal-setting tools
- Participants on track to replacing required income level in retirement
- Participant investment diversification
- Effectiveness of educational material and participant website
STEP 5: PREPARE BY CREATING A PARTICIPANT INQUIRY PROCESS
A fee review process would not be complete without a formalized process for handling participant fee inquiries should they arise. Participant inquiries may come in many forms, from a written request for information to a new employee raising his or her hand at a human resources meeting.
Here are five steps you can take to formalize your participant inquiry process:
1. Designate a person or persons to respond to participant inquiries. Once the inquiry is recorded, direct it to a designated individual to formulate the response. There should be a backup available in the event the designated person is away.
2. Create materials and prepare responses. Once the inquiry is submitted, prepared responses in the form of FAQs, comparative charts, etc., will be needed.
3. Develop a system to deliver the information. After the information is appropriately gathered there should be a system in place to deliver the information back to the employee making the inquiry.
4. Formalize a follow-up process. This step requires a follow-up communication with the participant after the inquiry was fully addressed. This important step will complete the circle of communication, and it will be easily recordable if participants later question the adequacy of the response to a participant inquiry.
5. Provide ongoing education. Conduct ongoing fee-specific employee education explaining the customary nature of the fees, the services for which the fees are charged and the process used by the sponsor to determine the reasonableness of the fees.
STEP 6: DOCUMENT IN YOUR DUE DILIGENCE FILE
Last, but not least, don’t forget to leave a paper trail! A fee review process shows that prudence and due diligence were used when fulfilling your fiduciary duty of determining the reasonableness of plan fees. If a legal issue ever arises regarding plan fees and expenses, the documentation in your due diligence file regarding your fee review process can help protect you.
Examples of the type of fee review process documentation that should be in your due diligence file:
408(b) 2 and 404(a)(5) documentation best practices
Fee disclosure regulations put equal importance on determining and documenting the process used to evaluate if fees are reasonable.
Here are some best practices for documenting a fee review process for 408(b) 2 disclosures in your due diligence file:
- The steps to take to ensure you have received all the required fee disclosure information from covered service providers.
- The steps to take if information is missing.
- Key people accountable.
- All annual reviews and decisions made.
- A calendar and timeline for all fiduciary tasks.
Steps to take if any information from covered service provider(s) is missing:
1. Request the disclosures in writing.
2. If you do not receive the requested information within 90 days, you must terminate services with the service provider and allow time to find a suitable replacement.
3. If you terminate services, you must report the service provider to the DOL.
Covered service providers may include recordkeepers, TPAs, attorneys, benefits consultants, actuaries, CPAs and investment advisors.