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Best Practices for Ensuring Retirement Plan Fee Reasonableness


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For nearly 40 years, ERISA has required retirement plan fiduciaries to ensure the reasonableness of service and investment fees paid by the plan. However, fee reasonableness has only recently grabbed headline attention due largely to the finalization of the 408(b)(2) regulations and the Missouri district court's decision in Tussey v. ABB, Inc. Despite the strength of its fee reasonableness standard, ERISA provides little practical guidance as to how and when plan fiduciaries should be making and documenting their fee reasonableness determinations. In this presentation, we provide a historical overview of the legislative, regulatory and judicial context surrounding this fundamental fiduciary duty; a look at recent Department of Labor regulatory examination activity centered on fee reasonableness; and a practical, step-by-step guide to meeting the fee reasonableness requirements.

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Best Practices for Ensuring Retirement Plan Fee Reasonableness

  1. 1. Best Practices for EnsuringRetirement Plan Fee Reasonableness ©2003 – 2013 Multnomah Group, Inc. All Rights Reserved.
  2. 2. Gina Gurgiolo, JD, LL.MGina Gurgiolo is a Senior Consultant for the Multnomah Group responsible forthe firm’s ERISA technical and recordkeeping vendor search consultingservices. Gina consults with plan sponsors on plan design, fiduciarygovernance, and vendor fees/services.Prior to joining the Multnomah Group in 2010, Gina managed the productportfolio for a national retirement services firm and directed the firm’s planadministration unit serving its largest clients. Prior to that, Gina managed theretirement plan compliance and regulatory policy functions at another nationalretirement services firm.Gina earned her JD from the University of Pittsburgh and her LL.M in Taxationwith an emphasis in retirement plan and executive compensation law from theUniversity of Denver. Gina is a member of the Portland Chapter of the WesternPension & Benefits Council, where she has been a conference speaker.2 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  3. 3. Agenda• Context and Historical Overview • Legislative • Regulatory • Judicial• Preparing for a DOL Audit • Most frequently requested information • Case study• Step-by-Step Guide to Fee Reasonableness • Fee reasonableness “to-dos”3 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  4. 4. Context & Historical OverviewWhat is “reasonable”?• Intangible no bright line• Agreeable to sound judgment or logic• That which is appropriate for a particular situation• Not excessive relative to circumstancesDetermining reasonableness requires comparison of alternatives andevaluation of processes usedUnder ERISA section 408(b)(2), retirement plan fees must be reasonable inlight of the services being rendered• But, no specific codified definition of what constitutes fee reasonableness per se • Impossible to be absolute about reasonableness determinations • Follow prudent process that contemplates alternatives - Using prudent process to negotiate/compare fees/services promotes improved participant outcomes• Must know and understand applicable fees to determine reasonableness• Where can plan sponsors find comprehensive fee information?4 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  5. 5. Context & Historical OverviewRegulations under ERISA section 408(b)(2) require annual covered serviceprovider-to-employer disclosure of fees• First-year deadline July 1, 2012• Empower plan sponsors to better comply with the fee reasonableness standard under ERISA section 408(b)(2)• Must terminate non-compliant covered service providers1974: ERISA is enacted, including section 408(b)(2)2007: Proposed fee disclosure regulations are issued2009: Revised 2009 Form 5500 Schedule C requests more fee information than ever2010-2012: Fee disclosure regulations are finalized and become effective; DOL investigation and enforcement activity increases2012: First retirement plan fee class action suit decided (Tussey, et al. v. ABB, Inc.); similar litigation looming5 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  6. 6. Context & Historical OverviewTussey, et al. v. ABB, Inc.• Federal district court in Missouri; appeal to Eighth Circuit Court of Appeals?• Case originated in 2006 from 15 separate complaints filed by ABB, Inc. employees• Separate actions certified as a class in 2007 ? first instance of a plan fee related class action suit• Plaintiffs awarded $37M because: • 401(k) plan fees subsidize corporate services benefiting executives • A lower cost share class of investments was available, but was not being used • Policies/process not being followed • Failure to pass excess investment revenue sharing back to the plan• Reaffirmed fee reasonableness standards under ERISA section 408(b)(2)• Similar litigation is looming • At issue is whether the plan fiduciary used a prudent reasonableness evaluation process, had the right level of expert assistance, and/or documented the process steps • No requirement to choose lowest-cost services and investment options, just act prudently and pay reasonable fees6 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  7. 7. Preparing for a DOL Audit• The DOL has the responsibility to enforce ERISA’s standards, including ensuring fee reasonableness• DOL investigation/enforcement activity is on the rise since 408(b)(2) regulations were proposed and fee litigation trend began• How are plans are selected for investigation?: • Randomly • For cause/“red flag” • 5500 reports late deferral remittance • Independent auditor issues qualified report • Participant complaints• Up to 6-year investigation period7 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  8. 8. Preparing for a DOL AuditWhat will DOL request?• Service provider information • Accountants, actuaries, administrators, attorneys, brokers, consultants, contract administrators, insurance companies, investment advisors, investment managers, recordkeepers, TPAs, valuation appraisers• Service agreements/contracts • Describing services, duties, obligations, responsibilities, fee / compensation / commission schedule• Service provider reports • Investment performance reports, audit reports, actuarial reports• Fee assessment and payment documents • Invoices, cancelled checks• Service provider selection documents • RFP, proposals, comparative evaluation analysis, negotiation communications, assessment of fees relative to quality of service• Investment documents • Revenue sharing information, share class identification, stable value fund illiquidity/redemption or surrender fees• Rebate information • 12-b-1 fees, sub-transfer account fees, marketing/services fees, expense reimbursement account deposits8 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  9. 9. DOL Audit Case Study: Fee ReasonablenessContext: Response / Outcomes:• 403(b) Plan Sponsor • Submitted requested information,• 2012 investigation including annual fee benchmarking, search effort documentation, fee• January 1, 2007 to present policy statement investigation period • No requested follow-up information regarding the DOL’s evaluation of fee reasonableness9 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  10. 10. Step-by-Step Guide to Fee ReasonablenessFee reasonableness to-do list: Maintain a Fee Policy Statement and other proper fiduciary governance documents (e.g. Committee Charter, Investment Policy Statement) • List applicable fees under the Plan • State whether the employer, forfeiture account, or participants pay the fees • State intent to ensure fee reasonableness Timely receive and review/analyze annual covered service provider-to- employer fee disclosure notice • Know your plan’s fees and understand how they work • Follow-up with questions as needed Benchmark recordkeeper’s fees to the market annually • Plan is not required to select the recordkeeper with the lowest fees • Fees must be reasonable in light of services rendered • Negotiate incumbent recordkeeper’s fees if they are higher than benchmarked range10 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  11. 11. Step-by-Step Guide to Fee ReasonablenessFee reasonableness to-do list (cont.): Request lowest-cost share class of investment options • Document the process and decision whether to implement Issue request for bid or request for proposal to the prequalified recordkeeper universe every 5-6 years • Coincides with typical statutes of limitations • Document the effort, resulting decisions and rationale Gather appropriate documentation in preparation for DOL investigation • Expect an audit and prepare to avoid scramble for documents (typically, 15-day response period allowed) • Organize service, investment and fee information requested in the event of an investigation11 Best Practices for Ensuring Retirement Plan Fee Reasonableness
  12. 12. DisclosuresMultnomah Group, Inc. is an Oregon corporation and SEC registeredinvestment adviser.Any information and materials contained herein or on our website are provided“as is” for general informational purposes only. It is not intended to becomprehensive for any particular subject. While Multnomah Group takes pridein providing accurate and up to date information, we do not represent,guarantee, or provide any warranties (either express or implied) regarding thecompleteness, accuracy, or currency of information or its suitability for anyparticular purpose.Receipt of information or materials provided herein or on our website does notcreate an adviser-client relationship between Multnomah Group and you.Multnomah Group does not provide tax or legal advice or opinions. You shouldconsult with your own tax or legal adviser for advice about your specificsituation.12 Best Practices for Ensuring Retirement Plan Fee Reasonableness