Recordkeeping Fees Under the Microscope

Recordkeeping Fees Under the Microscope

Retirement plans of all sizes are seeing their recordkeeping fee schedules questioned, especially when those fees are expressed as a percentage of assets.

Responding to PLANADVISER’s coverage of the recently revealed fiduciary breach lawsuit settlement entered into by the Massachusetts Institute of Technology (MIT), a reader sent the following query: “I noticed in the MIT lawsuit you reported that one of the non-monetary provisions was that fees paid to the recordkeeper for basic recordkeeping services will not be determined on a percentage-of-plan-assets basis. I assume MITs plan’s size [approximately $3.8 billion] was the reason that this was objectionable?”

The question sounds straightforward, but it actually keys into a complicated debate that is unfolding in the retirement plan industry about the appropriate way to pay for recordkeeping under the Employee Retiremnet Income Secuirty Act (ERISA). ERISA demands, among many other things, that fiduciary retirement plan sponsors carefully evaluate and monitor the reasonableness of fees being paid by their participants. The law does not stipulate, however, that one specific type of fee structure is superior in itself, nor does it suggest all prudent plan fiduciaries must run their plans the same way.

Taking a step back, the reader is right in that the general wisdom in the retirement plan industry was for a long time that small plans could reasonably pay for recordkeeping on a percentage-of-assets basis. Because 401(k) plans and accounts generally start out quite small, this approach makes for a good deal for new plans/participants, at least at first. Down the line, growing plans or those starting out with substantial assets can negotiate for per participant fees. But historically, even many large plans have long paid for defined contribution (DC) plan recordkeeping on an asset-based schedule.

Today, the landscape is rapidly shifting, and it definitely seems to be the case that per-participant recordkeeping fees are becoming the expected best practice, no matter what size the plan. Plaintiffs’ attorneys and progressive plan sponsors are driving this trend. Their argument is simply that, with today’s digital recordkeeping technology, it is no more work for the plan provider to administer an account with $1,000,000 versus an account with $100. Thus, the argument goes, it is not reasonable under ERISA for the fee to grow while the service being provided remains the same.

ERISA experts say the issue of what constitutes fair and reasonable recordkeeping fees is actually quite complex. One cannot simply say in isolation of other crucial details that one method of payment is better. In fact, some observers argue that asset-based fees are actually in a sense fairer and more progressive, in that participants with small balances pay less in fees relative to those people who have large accounts and presumably are wealthier. In the end, as explained by ERISA attorneys and judges ruling in ERISA cases, most important is that plan sponsors deliberate carefully and document their decisions—that a prudent process is followed in creating and then monitoring whatever fee structure is ultimately used.

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Warning signs in my 401k

401K's provide your employees the opportunity to have sufficient money available upon retirement, so they can enjoy a comfortable lifestyle. As the employer offering this valuable benefit, have you given any thought as to how the plan you intend to provide should be structured? There is significant variability between competing plans in cost to the employer, service to the employee, transparency, flexibility, etc.; all of which must be carefully weighed before choosing what best suits your goals. It can be daunting and time consuming to sort through the choices available and then select a plan that truly satisfies you and your employees needs. Oftentimes, the choice made is not optimal, yet because the process was so painful, the plan chosen is kept anyways. In many cases, that plan stays in place for years.

The following are some of the red flags to look for in your current plan or your plan moving forward:

  1. Annuity Plan Platform

The Annuity plan platform is usually a pre-packaged plan. The plan often offers a set fund list along with pre-packaged plan agreement terms that require few decisions to be made by the plan sponsor. One of the drawbacks to this plan type is that it has been historically difficult to identify administration fees. That presents a challenge for the Fiduciary, as one of their main duties under the law is to insure plan fees are reasonable. Another drawback is that many of the funds within the plan are not easily traceable, as they lack a "ticker symbol". This makes it difficult to individually track and monitor those plan funds. In the long term, an annuity plan platform makes it difficult to change one plan feature, without having to change everything.

Better Alternative-

Open Architecture Platform

This plan provides a platform that allows more customization. Open architecture structure allows access to a universal selection of funds. This may entail slightly more work, but this sort of structure allows for a more transparent view of fees. Although we believe this structure to be more beneficial in light of fiduciary requirements, be aware! Not all platforms claiming to be “open architecture” are created equal.

  1. Proprietary Fund Requirements

It is easy to be drawn into a lower fee by offering certain proprietary funds recommended by your Recordkeeping firm. Although some of these funds may be suitable at the time,  if you need to change those options in the future, it can bring about more issues. If you replace those proprietary funds, how will it affect the pricing of the rest of the plan?

Better Alternative-

No Proprietary Requirements:

It is smart to receive pricing on your plan without any proprietary requirements. Most providers will then offer a discount if the proprietary offerings are utilized. This will provide a record of the discount that will be removed if funds are changed in the future.

  1. Revenue Sharing Funds

We believe this to be the number one red flag in a plan that needs to be evaluated. Are the funds in your plan currently paying a revenue share back to one of the service providers? In other words, are you providing the lowest available share price in your plan? With thousands of mutual funds/ etfs to sort through, you need to make sure you are offering the most cost effective share price to your employees.

Ex: Fund Share Class X has an expense ratio of 0.75%; the fund pays 0.25% to the record-keeper.

Better Alternative-

No Revenue Sharing.

Ex: Fund Share Class Y has an expense ratio of 0.5%; the fund pays 0% to the record-keeper.

It is obvious which one is better for your employees. The service provider fees should be transparent and not rely on indirect "sharing".

  1. You Select Investment Lineup

If you do not know who is selecting the investment lineup, it is probably you. You are responsible for this action on an ongoing basis. If your company has not specifically outsourced it thru a third party 3(21) or 3(38) agreement, then it is your responsibility. If this is the case, you need an investment policy statement on file as well as a system to regularly monitor and replace poor investments (and make sure to record the process of monitoring and/or replacing).

Better Alternative-

Ousource through Third Party Investment Advisor.

Unless you are experienced in this field and feel that you can meet the DOL definition of prudence, this is your best choice.

3(21)- will provide you a list of funds to select from, but you will be required to make changes to the plan if the funds are removed from the list.

3(38)- the third party manager selects your fund line up and continues to monitor and make changes on your behalf.

  1. Guaranteed Interest Option With Trade Restrictions

Your plan will generally offer an investment option for “conservative investors”. As we cannot recommend the best way to go, we can recommend what features to look out for. It is easy to be drawn to a very high yielding rate, but are there stipulations to your employees moving money out of the account? These stipulations can often limit participants to move only 20% a year out of the fund into other investments, and we have seen some as high as 10 year restrictions! You also need to be aware of potential plan level restrictions if you decide to change this fund in the future. Many funds require a systematic payment, or they are subject to an MVA (market value  adjustment). These will reduce the value of your employees accounts when the fund is liquidated.

Better Alternative-

Conservative Option With No Restrictions

No one wants to have the talk with an employee about why their money is stuck in a fund or why their balance dropped when the plan was changed, so stick with a liquid conservative option.

  1. Conflict of Interest

Did you make your decision based on what was in the best interest of the employees? You are representing your employees, so you cannot make a decision based on a benefit to you that is not also an available benefit to them. Whether you are helping a family member or you are connected to an association, your obligation is to the employees, period. A number of service providers offer to sponsor associations, conferences or scholarships-which are all positive-as long as that does not influence your judgment when deciding on the best plan for your employees.

Better Alternative-

Avoid Conflicts

Remember, even if there is no malintent, it can still be perceived as improper. If a service provider is attempting to push you to violate your Fiduciary duty, it may be best to go with another provider.

  1. Absent Advisor

Advisors are very common in plans, but you need to know what the advisor fee is paying for. Are they selecting the investments, meeting with employees, providing group education to the employees, or actively managing employee portfolios? Advisors can do all of these, some of these or none of these. It is important to know that the advisor servicing your plan is either earning his/her keep, or being under compensated for all they are doing for your employees.

Better Alternative-

Advisor Contract

Get a written description of what your advisor should be providing. This will allow you both to understand the expectations of the other. You will also be able to hold them accountable for the services that they agreed to offer. If they are not performing as expected, it may be time to consider a new advisor.

  1. Knowing Fiduciary Responsibilities as Defined by the DOL.

As written in the DOL 'Meeting your Fiduciary Responsibilities', these are the basic requirements of a Fiduciary:

  1. Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
B. Carrying out their duties prudently*
  2. Following the plan documents (unless inconsistent with ERISA);
  3. Diversifying plan investments; and
E. Paying only reasonable plan expenses

 

*The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.

 Fiduciary breach suits have focused much more on establishing a process and sticking to the guidelines, as opposed to the results. Watch out for new 401k providers offering “cost saving platforms”. That is not to say these solutions are not viable, but remember, the process is what is important. You need to be sure to compare multiple offers that are providing the same features. "Their ad said they were better" or "they said they are cheaper" does not count as a process. Lastly, providing full disclosure to all of your employees is often the best policy. Everyone needs a little accountability!

Better Alternative-

It is best to bid out your plan at least every 3 years (or as major changes occur) and conduct an ongoing monitoring of the plan between these periods to make sure the services provided are carried out and the employees are happy. You should also benchmark your plan fees (compare to other plans with similar demographics) annually to make sure that your employees are not overpaying. If you do not feel confident that you can perform these duties, then you need to find a service that can do them on your behalf.

Fiduciary Shield by BidMoni was created to assist plan sponsors in identifying these red flags while allowing a cost saving, more transparent plan to your employees. Access BidMoni.com today to allow industry leaders to compete for your plan.

Watch BidMoni Demo FiduciaryShield at FinovateFall 2019

FinovateFall 2019 was held in New York City from September 23-25.  Finovate showcases the top tech innovations and provides a unique insight into the future of the fintech industry.

BidMoni was selected as a product demonstrator for FinovateFall 2019 to demonstrate the many ways FiduciaryShield is changing how advisors engage the 401(k) market.

CEO Stephen Daigle provided a live demonstration of FiduciaryShield within the 7-minute Finovate format.

Click here to view the entire 7 minute demo!

2 Cool Fintech Tools at FinovateFall

2 Cool Fintech Tools at FinovateFall

Startups presented a souped-up platform for retirement plan advisors and a family budgeting tool for financial services firms to use with clients.

Landmark Settlement in the Longest Running Erisa Lawsuit

ABB, Workers Get Early Approval for $55M 401(k) Settlement

Posted April 3, 2019, 1:08 PM
Landmark settlement in the longest running Erisa lawsuit, what were the conclusions:
  • Recordkeeping fees were excessive causing losses to participants (failure to bid and monitor service providers).
  • The plan replaced funds with proprietary, underperforming funds offered by the recordkeeper.
  • Indirect revenue received from funds must be paid back to plan participants.

 

This creates a foundation for breaches and penalties moving forward. Advisors and firms are going to be forced to change their way of doing business.

 

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