Fiduciary Benchmarks believes that the following 7 items represent “The Essentials” for any Plan Sponsor attempting to meet their fiduciary obligation to determine fee reasonableness.
Essential #1 – Use the RIGHT data
100% of the data used to determine fee reasonableness should come directly from the source – the Service Providers who know your plan best. This insures that all data is current, accurate and consistent with 408(b)(2) disclosures.
Essential #2 – Build a Fair and Repeatable Process
The process for determining fee reasonableness needs to be impartial and independent to insure that no business model or structure is either advantaged or disadvantaged by the analysis. In addition, the process should be repeatable so that every plan is reviewed in the same manner and the approach is consistent over time.
Essential #3 – Customize Benchmark Groups by Service Provider
The Benchmark or Comparison Group should be built by Service Provider and consider the following factors:
- The group for each Service Provider should be built considering the economic factors that drive the pricing for providers business. For example, for Recordkeepers and Third Party Administrators those factors would include Plan Assets, Participant Count and Average Account Balance
- The group should be statistically valid which means it should include a meaningful number of data points, outliers should be removed and predictability to should be strived for
- The group should be diversified to insure that no single service provider dominates the group, that a variety of business models are represented and that the it is representative of the construct of the market segment
Essential #4 – Consider the Quality of the Service Provider
The quality of a Plan’s Service Providers is an important component of determining fee reasonableness. We believe that quality can be discussed using the following framework:
- The Firm – i.e. are they dedicated to the retirement plan space, do they have expertise with your particular industry, what types of credentials do they have, etc…
- Services/Processes – i.e. what is their definition of plan success, do they have a process to mitigate conflicts of interest, how are they protecting/improving the plan, etc…
- People/Technology/Resources – i.e. team, technology, profitability/sustainability, etc…
Essential #5 – Assess Scope of Services
The Scope of Services that you receive from your Service Providers will have an impact on your plan fees. Essentially, the more services your plan receives, with a higher frequency or volume and a greater degree of difficulty the more likely it is that your plan will have a higher cost. Remember – if your plan is achieving better results it is acceptable to pay additional for higher service levels.
Essential #6 – Examine Value Delivered to the Plan Sponsor and Participants
Service Providers can add value for their Plan Sponsors and Participants in a variety of different ways. We believe that value can be discussed using the following examples of value added support:
Value to Plan Sponsors:
- Recordkeepers and Third Party Administrators
- Are their services accurate and timely
- Do they provide you the support you need to manage your plan and answer participant questions
- Do they assist you in determining plan design options that could better enable your participants to retire well
- Are they providing investment services that help improve the performance of your plan?
- Do they help you insure that the service levels of your other service providers are being met or exceeded
- Are they keeping you informed of the latest developments in plan design?
Value to Participants
The value the Service Providers provide to Participants is likely the most important metric discerned as part of a fee reasonableness review – how well is the plan assisting participants in preparing for a dignified retirement? The considerations when evaluating this data range from Participant Success Measures (i.e. participation rate, deferral rate, etc..) to the all-important projected account balance at normal retirement age
Essential #7 – Track & Compare Fees While Allowing for Extra Credit
You need to understand the totality of the fees you are paying and that they are all accounted for. You may also want to know that you are a “good consumer” and that you are paying something similar to your peers. However, we feel a more important data point is what are you paying for the value that you are receiving? This involves a more granular fee comparison where you not only look at what your Service Provider is being paid but you look at the services they are providing and the monetary value of those services. Remember it is OK per the DOL to pay more if you are receiving more services or achieving better results.