The Changing Landscape of Retirement Plan Fees: Understanding Your Fiduciary Responsibilities

Remember the good old 1980s and the classic TV show G.I. Joe? At the end of each episode, there was always a memorable public service announcement (PSA) teaching kids valuable life lessons. Characters like Duke, Lady Jaye, or Snake Eyes would pop up to guide children through tough choices, always concluding with, “Now I know,” to which the G.I. Joe character would respond, “Because knowing is half the battle!”

Just like those G.I. Joe PSAs, if you're in charge of your organization’s retirement plan, you have a big responsibility to your employees and your organization under section 404 of ERISA Law. This means ensuring you’re paying only reasonable fees. The tricky part is figuring out what’s reasonable and then taking the right steps to manage those fees effectively. It’s a significant duty, and as a result, fee management has become a hot topic among regulators, the media, and American workers alike.

ERISA’s Regulations Aim to Promote Transparency

For years, 401(k) plans were notorious for hiding fees. As a result, in 2011, ERISA introduced two key fee disclosure regulations to promote transparency:

• 408(b)(2) Regulation (Plan Sponsor Disclosure): This requires service providers to disclose their services, compensation, and fiduciary status to ERISA plan fiduciaries, helping them make informed decisions.
• 404(a)(5) Regulation (Participant Disclosure): This mandates that plan sponsors provide participants with detailed information about fees, expenses, and plan investments to promote transparency.

These forms were designed to give participants and plan sponsors clear, easy-to-understand overviews of how fees affect their strategies. Yet, even still, many plan decision-makers struggle to grasp and manage these fees effectively despite the disclosures. Common concerns include:

• “I don’t know how much we’re paying in fees.”
• “I suspect our fees are high, but I’m not sure.”
• “I’m worried about fiduciary risk because I keep reading about lawsuits.”
• “I’m too busy to focus on fees.”

Steps to Determine Your Total Fees

Getting a clear picture of your plan’s fees might feel like deciphering an ancient map, but don’t worry—it’s more straightforward than you think. Here’s a step-by-step guide to help you navigate through it:

1. Review Plan Documents: Start by diving into your plan’s summary plan description (SPD) and other plan documents. Think of it as your treasure map; these documents often hold valuable information about fees and expenses.
2. Request Fee Disclosures: Don’t hesitate to reach out to your plan administrator for detailed fee disclosures. Under ERISA regulations, they’re required to provide this information. It's your right to know where every penny is going!
3. Use Fee Comparison Tools: There are fantastic online tools and resources that can help you compare fees across different plans and providers. It’s like having a financial GPS to keep you on track.
4. Consult Independent Advisors: Consider teaming up with a fiduciary advisor who can help you break down and manage your plan’s fees. Think of them as your co-pilot on this financial journey.
5. Benchmark Fees: Finally, compare your plan’s fees with industry benchmarks to ensure they’re reasonable. This is where Link Financial Advisory comes in—our free benchmarking tool allows Plan Sponsors to benchmark their entire plan in about 10 minutes. Simply follow the link, answer the questions, and you'll get an immediate 0-100 point score on your plan's health, helping you find ways to optimize it as a whole.

Resources from the Department of Labor (DOL)

Navigating the world of retirement plan fees can feel overwhelming, but the Department of Labor (DOL) does have some resources to help! The Employee Benefits Security Administration (EBSA) offers several handy resources to help you out:

• Understanding Your Retirement Plan Fees: Think of this as your go-to guide. It explains all the different types of fees and gives you tips on how to evaluate them. It's like having a retirement plan fee encyclopedia at your fingertips!
• FAQs on Disclosures: Got questions? This resource has a list of frequently asked questions and answers about retirement plan fee disclosures. It's super helpful when you're trying to wrap your head around all those details.
• Retirement Plans - Compliance Assistance: Need some compliance advice? This section provides information on compliance assistance and fiduciary responsibilities. It's like having a compliance coach guiding you through the process.

Ensuring Transparency and Appropriate Fees in Retirement Plans

Getting a handle on the fee structure and the cost of services in your retirement plan is crucial for fulfilling your fiduciary duties. Complete and transparent fee disclosure isn't just nice to have—it's essential.

Key Tenets of Plan Fees

• Nothing is free, and no one works for free: If it looks like there are no fees, chances are they’re just hidden somewhere.
• You get what you pay for: Bargain services might come with lower returns or hidden costs.
• Flat fees help control costs: Opting for flat-fee models can provide greater transparency and make cost control a breeze.
• Benchmarking is essential: Comparing fees through benchmarking ensures they’re fair and reasonable.

Service providers might get paid in various ways, often resulting in hidden fees. Transparent and standardized fee disclosure can build trust and ensure you’re staying compliant with fiduciary responsibilities.

Understanding the Real Costs in Retirement Plans

Retirement plans come with various costs involving multiple entities, but having more service providers shouldn’t necessarily mean higher overall expenses. Clear disclosure of who pays whom and how much is crucial. Generally, plan expenses fall into three categories:

1. Plan Administration Fees: These cover the maintenance and service of the plan, including recordkeeping, administrative services, audit services, custodial services, and more. Fees can be flat, asset-based, or per-head, and can be paid from plan assets or directly by the employer. Often, transparency is lacking, with some fees being hidden as subcontractor charges.
2. Participant Transaction Fees: These are for optional services used by individual participants, such as distribution or Managed Accounts fees. Employees requesting the service pay these fees, not all plan participants. It’s important for fiduciaries to ensure these fees are fair and not excessive.
3. Investment Fees: Typically the largest expense, these are asset-based fees paid by plan participants for investment funds within the plan. These fees include investment management fees, sub-transfer agency fees, and marketing fees (e.g., 12b-1 fees). Monitoring and understanding these fees are vital because they directly impact investment returns and performance..

Advice on Controlling Costs

Depending on your plan size, flat fees, instead of asset-based fees can enhance transparency and help control costs. Flat fees remain the same as plan assets increase, making them a sustainable option as your plan size grows. While some argue that service providers should benefit from plan growth, others believe charging more without additional services is indefensible.

The Importance of Benchmarking

Without benchmarking, comparing plan fees is guesswork. Fiduciaries should use independent sources to benchmark costs. An entire industry has developed to provide better information and make informed decisions.

At Link Financial Advisory, we offer a free benchmarking tool that Plan Sponsors can use. By clicking the link, you can benchmark your entire plan in approximately 10 minutes. This Benchmarking Report will give you an immediate 0-100 point score on your plan's health, helping you identify ways to optimize it as a whole. A trusted plan fiduciary advisor can be invaluable in drafting and implementing disclosure policies, maintaining compliance with ERISA 408(b)-2, and renegotiating service contracts.

Conclusion

Understanding and managing the evolving fee landscape is essential for fulfilling your fiduciary responsibilities. By keeping up with regulatory changes, being aware of litigation risks, leveraging media insights, and working with specialized fiduciary advisors, you can manage your retirement plan effectively and transparently.

Because knowing is half the battle!

Ready to learn more? Use our Free Benchmarking Tool to see how your plan stacks up. You can also email me directly at Robert@LinkFinancialAdvisory.com or call me at 406-369-3396.