As we await the latest decision by our elected officials and their friends at the Department of Labor, none of whom are (or ever have been) fiduciaries, let's examine more closely the perils and pitfalls that may await the unwary plan sponsor (otherwise referred to as our client).
It is accepted knowledge, even by Congress and the Department of Labor, that all retirement plans will be impacted by fees and expenses. And, oddly enough, neither Congress nor the Department of Labor requires plan fees to be the least expensive; only that they be "reasonable."
From past experience, the "reasonable-ness" of fees is largely determined when the Department of Labor, for whatever reason, decides to pay your plan sponsor a visit. And while a visit from the Department of Labor can be both objective and subjective simultaneously, there are certain proactive and preemptive procedures you and your plan sponsor implement (prior to the DOL visit) that would be particularly prudent.
But first: let's define, generally, what the Department of Labor expects of the plan sponsor (and you) in determining the "reasonableness" of fees and expenses.
The Department of Labor would prefer the plan sponsor (your client):
- Proceed with prudence and exclusively in the best interests of the plan participants; and,
- Periodically review those cost and expenses of the plan and make any changes to those fees and expenses where prudence dictates.
The review process for costs and expenses needs to be broadened (a bit) before beginning the review process to ensure reasonable-ness. Generally, the definition of fees and expenses encompasses the following:
- All investment derived expenses; and
- Plan administrative costs;
(Also should the plan be in the process of being converted to a safe harbour plan, for example, or should the plan be in the process of terminating itself, those costs and expenses need to be factored in as well.)
So what can be done to help the plan sponsor (your client) determine the review process to ensure the reasonable-ness of all fees and expenses?
- There should be an annual review process, as specified in the plan sponsor's (your client's) Investment Policy Statement, that includes all fees and expenses of the plan;
- That review process should compare your plan sponsor's plan against similarly sized plans as one benchmark to determine if your plan sponsor's plan is receiving value for those costs and expenses;
- That there is an established procedure (again within the Investment Policy Statement) that clearly specifies how costs and expenses are allocated to the plan; and,
- That the disclosure to all present and past plan participants (those who have retired/terminated who have left their assets with the plan).
Please remember neither the Department of Labor nor their congressional colleagues (currently) require that the fees and expenses incurred be the least expensive; merely that those fees and expenses are reasonable and routinely reviewed. It also helps, in our experience, if the procedures of reviewing plan fees and expenses are written and actually followed.
If you would like a copy of our plan fee and expense evaluation form, please e-mail me at colin@theretirementcompanytoday.com.
