How do you know if the 401(k) fees [or (403(b)] being paid on your plan are ‘reasonable’?
The Department of Labor makes it clear that a plan fiduciary must conduct a thorough and diligent investigation and a rigorous analysis of relevant information when selecting and reviewing plan providers and investment options.
“The fiduciary must establish procedures for controlling and accounting for investment expenses in order to fulfill the obligation to manage investment decisions with the requisite level of care, skill, and prudence; and to fulfill the specific obligation of the fiduciary to pay only reasonable and necessary expenses.”
– fi360, Inc.
In order to demonstrate one of the key fiduciary responsibilities—that of seeing that employees are only pay ‘reasonable’ 401(k) fees —a plan must have a process in place to document an expense review and comparison to industry averages.
A plan does not have to be the cheapest in order to demonstrate prudence practices are being followed. A plan should, however, be able to show documentation for the decisions made regarding provider and investment selection, and have a process to ensure 401(k) fees paid are not excessive compared to similar options.
Most companies do not have a system in place to compare their existing plan against industry averages. Companies looking to set up a new plan or change plans have a difficult time comparing various proposals because each provider has a different format for presenting the information.
The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. The Due Diligence Review™ is a key step in this process. By completing this step, you will document your plan provider selection process as well as a comparison of 401(k) fees to document and verify what you are passing through to your employees is ‘reasonable’ per ERISA guidelines.
It is recommended that a comprehensive 401(k) fees for services review be conducted about once every three years.
408(b)(2) and 401(k) fees
Passed in 2012, the new 408(b)(2) rule requires providers to disclose in writing the services, 401(k) fees, and fiduciary status accurately and thoroughly and that the information must be considered by the steward before they enter into an agreement, in order to meet the exemption.
The following items must be disclosed and evaluated:
- Services to the Plan. The provider must disclose what services will be provided to the plan.
- Fiduciary Status. The provider must disclose if they are serving as an ERISA fiduciary or as a registered investment adviser to your plan. If a service provider is not acting as a fiduciary, they do not need to state this in writing.
- Compensation. The provider must disclose any compensation received in connection with your plan. Compensation can be defined as anything of monetary value, such as gifts, awards, trips, etc. It also includes any payments to affiliates or subcontractors of your provider. Compensation can be expressed as a dollar amount, formula, percentage of covered plan assets, or per capita participant charge.
Compensation reported is divided into four categories: direct; indirect; related party and termination.
The manner in which the 401(k) fees will be paid must also be disclosed, such as if the plan will be billed or if the fees will be deducted from participant accounts.
It’s the plan sponsors responsibility to ensure receipt of these disclosures and to understand and evaluate them for reasonableness prior to entering into an agreement or renewing an existing arrangement.