Fee Lawsuits Are Real

The recent wave of fee litigation against sponsors of retirement plans focuses on whether plan fees are “reasonable” compared to the market place. Plan Sponsors have a fiduciary responsibility to ensure that any fees assessed by service providers are, in fact, reasonable. According to the Department of Labor, Fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable. How do you know if the fees you are paying are reasonable? The first step is to identify and understand these fees.
There are two types of plan fees assessed to participants: administrative fees and investment management fees.

Investment Management Fees – These are the asset-based fees paid by participants to manage the investment portfolios. These fees help pay for the everyday functions of managing the portfolio including but not limited to salaries to the portfolio management staff, the rent/mortgage payments for the office space, the expenses associated with the analysts’ due diligence visits and staff bonuses.

Administrative Fees – The administrative fee compensates the provider for the overall administration of the plan. These fees can be asset-based, flat or some combination of the two. These administrative services include statement delivery, on-site communications by the firm’s representative, record keeping, system maintenance, and development and custodial services.

Lack of Fee Transparency:

In many cases, these fees can be combined as a single fee which makes it difficult to decipher between the actual amount of the investment management fee and the administrative fee. Furthermore, these fees are often deducted before any earnings are posted to an investor’s account. Participants never see the amount of money paid to the service provider or the investment manager.

Case Study:

In a recent case, a plan sponsor initiated a study to benchmark the fees in their program due to one employee complaint. No one at the sponsor level knew the fees that were currently being assessed by the provider. Additionally, the provider’s investment architecture consisted mostly of their own proprietary funds which was deemed as a potential conflict of interest. Participants in non-proprietary funds were charged a slightly higher record keeping fee.

To assist with the situation and conduct a search, Bolton gathered data from the plan and submitted a Request for Information (RFI) to various leading industry providers to compare the current costs to costs on the open market place. The survey also asked vendors whether they could provide an open architecture where the Plan Sponsor could independently select non-proprietary investments. Lastly, providers were asked if they could show the administrative fees on participant statements. Providers were given 4 weeks to respond. The results of the survey are shown in the following table:

Results: The study indicated that the plan was using an older contract with higher administrative expenses. These expenses were deemed to be 3 times greater than the market place for similar levels of service. Furthermore, these providers gave the sponsor the ability to replace the vendor’s own proprietary funds, and could show the administrative fees on participant statements.

The plan’s investment management fees were also evaluated. For the most part, they were deemed reasonable to the market place. However, the expense of the provider’s S&P 500 Index option was more than double a comparable lower cost option.

The study provided the impetus for conducting a formal Request for Proposal (RFP) to survey the market place. As a result of the RFP process, the Plan’s pricing was reduced by over 70%.

Takeaways:

It is important to become familiar with the fee structure in your plan. Once you know and understand the plan fees, the next step will be conducting a fee benchmarking study. As a best practice, it is generally recommended that a Plan Sponsor conduct and document the results of a fee benchmarking study every 3 years to ensure that their pricing is competitive to the market place. Finally, continue to monitor your service provider to ensure the program fees correspond with the level of service you are receiving.