Best Practice #7: Establishing a Regular Fee Comparison and Review Process

September 5, 2016—Welcome to the Alliant Best Practices Series for 401(k) Plan Sponsors, in which we offer 10 best-practice essentials for helping plan participants achieve retirement plan success. Here’s the seventh best practice in our series.

“This witch’s brew of hidden fees, conflicts of interest and complexity in applications is at odds with investors’ best interests.”

– SEC Chairman Christopher Cox

In our last post we discussed the importance of establishing a strong investment committee to implement the responsibilities laid out in the investment policy statement (IPS). It’s also important to have an established and well-documented process for comparing the fees being charged by various retirement service providers and ensuring those fees are reasonable.

There are several reasons why you need this process. First, it is in your interest to know that you are not being overcharged by service providers. Some 401(k) providers make it particularly difficult to know the full extent of fees charged to the plan – and it is in their interests not to tell you.

Second, it is part of your requirements as a fiduciary under the Employee Retirement Income Security Act (ERISA) to ensure that plan fees are reasonable. If the fees are not reasonable, several bad things will happen, and some (arguably worse) things could happen:

  1. You will be overpaying.
  2. You could be sued by your plan’s participants. This is a growing area of litigation where attorneys, such as the notable Jerome Schlichter, have won awards from their clients to the tune of tens of millions.
  3. You could be investigated and fined by the Department of Labor (DOL). The average fine ranges from $250,000 to $450,000.

There are two key ways company managers can fulfill the Department of Labor requirements regarding fee reasonableness.

  1. Perform a Request for Proposal (RFP). This is essentially a bidding process for similar service providers and is usually spearheaded by Human Resources. The RFP process can take several months – the larger the plan, the longer the process usually takes. Some company managers outsource the RFP process to third parties to save themselves the time.
  2. Enlist the services of an independent advisor to perform a benchmark of your plan’s fees. Benchmarking is a low-cost, quick, and easy alternative approach to assessing reasonableness of fees for services rendered by a provider. Benchmarking can be easily provided on a yearly basis to assist with the monitoring of fees, services, and business relationships. It’s an efficient process that delivers reliable results for decision making.

Ideally, either an RFP or a benchmark will be performed every three to five years. We at Alexandria Capital can perform both of these services for you. In addition to fee reasonableness, we can also compare your plan to others in its peer group by these other measurements as well:

  • Fund Performance
  • Participation rate
  • Company contribution
  • Number of investment options

Do you like what you’ve read so far in our Alliant Wealth Best Practice Series for 401(k) plan sponsors? We also offer a complimentary presentation to further explore these best practices with you and other key retirement-plan decision-makers at your company. Please contact us to learn more.