Protect your plan by taking these preventative steps.
Lawsuits against retirement Plan Sponsors of large colleges and universities continue to make headlines in the news. Many of these institutions are among the most prominent and prestigious in the country. No entity is immune from a class action lawsuit. Some 403(b) plans have been on auto pilot for several decades and Plan Sponsors are not using their negotiating power to reduce fees and streamline investment options. Since participants always pay some of the fees-and often most of them- failure to control costs directly affects individual benefits. Participants have begun to take notice and are bringing legal action against plans for failure to meet their fiduciary duties.
These lawsuits center on a variety of governance issues, with the largest being: unreasonably high and hidden administrative and investment management fees as well as a lack of fee transparency and disclosure. Plan fiduciaries have also failed in the following areas:
- Monitoring investment options
- Reviewing share classes
- Timely rebidding of the plan to survey the market place
- Investigating the allocation of plan fees
- Identifying potential conflicts of interest
What is the significance of being a Fiduciary?
Retirement Plan Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of the participants and their beneficiaries. These responsibilities include:
- Acting solely in the interest of the plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
- Carrying out their duties prudently
- Following the plan documents
- Diversifying plan investments
- Paying only reasonable plan expenses
Steps to ensure your committee is administering a compliant plan:
Review Committee governance. It is essential for committee members to fully understand their fiduciary responsibilities. Essential supporting documents include a committee charter, Investment Policy statement, and fiduciary acknowledgement letters. These documents will help the Committee members understand and effectively meet their fiduciary duties to the plan. The Charter should include how frequently the Committee will meet and how to define a quorum.
Conduct a competitive bid process. A competitive bid process allows the Committee to see and take advantage of the latest market developments in plan operation. This is also the time to negotiate lower fees. As a general guideline, Plan Sponsors should establish a process of rebidding the plan every 5 years to obtain the most competitive results.
Review share classes. The Committee should review the share classes of the funds offered to participants.
Generally, a plan should offer the least expensive share class available. In any event, fees should be reasonable and fully understood. Very few plans document how the number of providers is determined and how this impacts plan fees. Program fees generally increase as the number of providers increase. Although ERISA does not require a plan to have a sole provider, if a Plan Sponsor decides to select more than one provider, it should be clearly defined and documented, and the Committee should be aware of how these providers are being paid. If providers are being paid differently, the Committee should know why.
Know the fee structure. Plan Sponsors have a responsibility to minimize program fees for participants. There should be a documented process for ensuring that the most attractive pricing for participants is being utilized. This includes periodically reviewing the provider contracts and comparing fees to the market place. It is deemed a best practice to ask the provider for their most competitive contract as many providers will not volunteer it. The biggest takeaway is for the Committee to know and understand the fee structure. How does it work? Who is getting paid? Are these fees reasonable?
“If investment fees are one percentage point higher than a reasonable amount, the participant’s retirement account will be 28 percent lower after a 35-year career.”
-U.S. Department of Labor
It should be noted that while the Committee has an ongoing fiduciary responsibility to monitor the investment options, ensure that the plan fees are reasonable and to act in the best interest of the plan’s participants; service providers are not fiduciaries and are not responsible for the offerings in the plan.