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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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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