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What Plan Sponsors Must Do To Avoid Fiduciary Liability From These 3 Common Fee Blunders

What Plan Sponsors Must Do To Avoid Fiduciary Liability From These 3 Common Fee Blunders
June 05
00:03 2018

What are the biggest fee mistakes plan sponsors make?

At the source of every headline grabbing fiduciary breach trial is a fee mistake. Of course, not every fee mistake reaches the level of a class action lawsuit. Many are simply “bad decisions.” How can learning more about these everyday fee mistakes help 401k plan sponsors avoid them and the fiduciary liability they bring? Here are three of the most common plan sponsor fee mistakes and what to do to avoid them.

#1: Allowing Fees to Overwhelm

Most plan sponsors have day jobs that keep them quite busy. As a firm takes on more employees, the retirement plan benefit takes on the complexity of a separate business unto itself. What started out as a relaxing hobby or side venture has morphed into a full-time job. The typical plan sponsor never sought to become an expert in retirement plans, yet, there it is. As a result, plan sponsors often “do not understand the plan and its costs,” says Jerry Lynch, President of JFL Total Wealth Management in Boonton, New Jersey. For example, he’s quick to point out “‘Free’ plans are not free.”

“Most plan sponsors don’t know where to begin,” says William Ryan, Director of Retirement Services Group for LCM Capital Management, Inc. in Chicago, Illinois. Yet, to paraphrase Maria Von Trapp, a very good place to start is at the very beginning. This could simply mean to collect all the relevant material and put in one place. Ryan says, “The gathering of all appropriate disclosure documents and maintaining a plan due diligence file will help with understanding the fiduciary role providers assume.”

Lynch says to solve this feeling of being overwhelmed, plan sponsors should “get a detailed list of expenses… TPA… Adviser… funds… etc. Think of the dollars you pay for the plan as your money, especially if it is an employee cost. Is it really worth it? A lot of what is offered is white noise.” He believes plan sponsors should “have a 401k committee that looks at the plan systematically. I would suggest one finance person, one HR, and some core employees with larger balances who have a vested interest in lowering plan cost and increasing services. Higher costing (employer) plans are generally better for the employee, but you still need to check.”

#2: Share Class Confusion

Ryan, who works in the small to mid-sized markets, sees “a general lack of understanding mutual fund ‘share class’ differences and platform availability.” He’s most concerned about plan sponsors who fail to obtain and understand all vendor disclosure documents. “If the absence of appropriate disclosure documents creates a prohibited transaction,” he says, “95% of the plans we review are unknowingly in violation.”

Even after all the media attention paid to conflict-of-interest fees and share classes in particular, a few plan sponsors still haven’t made themselves as aware as possible. “They don’t understand that there are different share classes, and therefore different costs, of mutual funds,” says Robert Gibson, a Fiduciary Consultant for Centurion Group in Plymouth Meeting, Pennsylvania. “In general, you frequently see an ‘institutional investor’ – a retirement plan – purchasing ‘retail’ share class mutual funds.  These ‘retail’ funds are loaded with 12b-1 fees, commissions, sub transfer agent fees, etc. These retirement plans should be using less expensive mutual fees that do not pay fees and commissions. Most of the fees and commissions are being paid to the recordkeeper and ‘advisor’ or broker. Frequently, plan sponsors don’t understand these fees or who is being paid. As plans grow with more assets in the plans, the fees can quickly accumulate and become unreasonably high. This may lead to lawsuits. More importantly, it leads to participants overpaying for services and unnecessarily reducing their account balances.”

Avoiding this mistake starts with awareness. “Plan sponsors need to pay attention and ‘know what they don’t know,’” says Gibson. “Ask questions and gain a general understanding of the concept that mutual funds have different share classes. The share classes are different only in price. The underlying investments are identical!!”

#3: Lack of Benchmarking

Before you can benchmark, you must know what you’re seeking to benchmark. In this way, it’s related to the first item on our list. “The 2 biggest mistakes that I see 401k plan sponsors make is not knowing the fees that they are paying and not understanding the services that the fee includes,” says Jairo Gomez, Director of Retirement Plan Services at Hanson McClain Advisors in Sacramento, California. “You want to understand how much you’re paying in comparison to the service that your receiving. It’s all about the value of the plan.”

Benchmarking is a matter of due diligence and documentation. It’s not that difficult once the plan sponsor establishes a template. But that’s the rub, isn’t it? “The problem is that the retirement plan industry is lacking true performance standards, including standards for plan fees,” says Cody Mendenhall, Executive Director at Pension Consultants, Inc., Springfield, Missouri. “While most industries and professions have clear and measurable performance standards, the retirement plan industry has struggled to provide transparency into plan fee performance.”

If plan sponsors can plan ahead, benchmarking can be included within vendor contracts. “The best way to avoid this mistake is to periodically review your service agreement,” says Gomez. “Look specifically at what you’re getting in comparison to what you are paying. Be sure to benchmark your plan and review your 408(b)(2) and your 404(a)(5).”

Beyond baking benchmarking in the cake of contract, a little data gathering and analysis can go a long way. Mendenhall says plan sponsors need to “measure plan fees and benchmark. Looking at a twelve-month period, add all the fees charged to the plan. Then divide the total dollar amount by the size of the plan to determine the percentage fee (basis points fee). Finally, compare the percentage fee (basis point fee) to the benchmark fee for a plan of similar size.”

Gibson sums up the situation nicely when he says, “Plan sponsors need to take a greater interest in understanding all of the plan fees and how they are paid. Retirement plans are much more than simply picking investments. They have been made complicated, overtime, by financial professionals and institutions who did an excellent job of ‘hiding the fees.’ Most plan sponsors don’t write checks for retirement plans because the fees are paid out of plan assets. Therefore, they never really paid much attention to the cost of the plans because there was no cost to the company – there was no ‘line item’ on the financial statement. Times have changed!! Plan sponsors are under increasing pressure from a fiduciary risk perspective and, more importantly, they should be improving their plans so that their employees can have a better retirement outcome. It’s not difficult to have an exceptional retirement plan. Plan sponsors simply need to select the right partners and pay attention!”

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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