Fee Benchmarking Made Easy

A topic that we get asked about a lot is how to understand the true cost of a retirement plan, and then how to compare that cost to the market.  This is not just a “nice to know” kind of thing; it is fundamental to the role of a plan fiduciary under ERISA.

Why should you benchmark plan costs? 

Knowing that the cost of your retirement plan is reasonable given the services you and your plan participants receive is an explicit duty under ERISA.  If the U.S. Department of Labor shows up for an audit, they are going to want to know that you have a prudent process in place to quantify and evaluate plan costs, and to compare your plan’s overall expenses to market rates.  Lawsuits involving plan fess are becoming more common, and are not always directed at the largest employers anymore.  Finally, lower costs translates into better retirement outcomes for your plan participants, so it pays to ensure plan expenses are reasonable.

How is it done?

  • Identify all providers. Your recordkeeper, TPA, custodian, investment advisor, directed trustee, etc.
  • Figure out how and what your providers are being paid. Look at contracts, employee notices, invoices, public mutual fund data, 5500 schedules, etc.  Compare actual returns to published returns.  Are they paid directly, by the plan, by revenue sharing, by formula, or another form of compensation?
  • Understand any hidden costs.  “Hidden” doesn’t necessarily mean “bad” but it does mean that you’ll need to understand the magnitude and treatment of things like revenue sharing, surrender charges, etc.
  • Convert everything to dollars or percentages.  Benchmarks are usually stated as percentages; however, if comparing to alternate providers, converting to dollars is often helpful.
  • Compare to a benchmark.  Make sure the benchmark is independent, and that it reflects all of the services that your plan is receiving from its providers.
  • Consider the value received for the cost paid.  There is no easy formula for this, but if you know that your plan is on the higher side expense-wise and you are less than satisfied with the service that is given in return, chances are you need to dig deeper.
  • Repeat annually for ongoing monitoring.  Once you have a system in place, this tends to be easier to maintain from year to year, and you can watch for fee “creep” as your plan grows.

What are some caveats?

  • There is no ERISA requirement to choose the lowest cost provider.  You need to consider what services you need for your plan to be effective.  In addition, cheap now could mean expensive later if there is a problem.
  • Nobody works for free.  If you encounter a provider who says they are free or seems deeply-discounted, you will want to look more closely for hidden expenses such as revenue sharing, insurance wraps, etc.
  • Watch for conflicts of interest.  As an example, if your provider is giving you a “break” on your plan because you have other business with them, or vice-versa, proceed with caution.
  • Make sure you are allowing for differences.  In both the services provided an the quality of those services.  For example, not all investment advisors are fiduciaries, and fiduciary advisors do rightfully tend to cost more.

Are there any other tips?

  • Make sure your provider has you in the cheapest share class, all things considered.
  • Consider pulling in an outside partner if you don’t have internal resources to properly evaluate costs.
  • A fiduciary MUST question what he or she does not understand; it is part of the job.
  • Review fee schedules for extra costs, i.e. for transactions, special contribution formulas, etc. to ensure you have the complete picture.  Watch transaction costs closely (e.g. paper statement fees, distribution charges, etc.); they can add up when there is high volume.

This sounds like an awful lot of work!

Benchmarking a plan’s overall costs is not easy, and there are many traps and pitfalls.  That said, the numbers are all there, it is just a matter of finding them and putting them into the proper context.  A good provider can help you with the process, whether it be your current provider (if they are a fiduciary) or a different firm.

Interested in a free, basic consultation on your plan’s costs?  Contact our experts today!

Scott Gehman, ERPA, CEBS
Retirement Plan Consultant