All employers offering a retirement plan to their employees have a fiduciary responsibility to ensure their plan fees are reasonable. After all, excessive fees can directly impact the bottom line for plan participants. However, while this responsibility seems straightforward, when you really think about it, what does “reasonable” mean? There’s no specific description or calculation that defines the word “reasonable” when it comes to plan fees.
To make sure you’re meeting this fiduciary responsibility, we recommend a multipronged approach to analyze your plan fees.
1. Understand your fees and how they’re assessed.
The first step in keeping your plan fees in check is making sure you understand all the fees associated with your retirement plan and how they’re assessed. The three basic types of plan fees include:
- Administrative Fees: The costs of maintaining the plan including asset custody, plan and participant recordkeeping, compliance, plan communication, notices and educational materials. Administrative fees can be paid by the employer and/or passed back to the plan participants.
- Investment Management Fees: All costs associated with the management of the plan’s investments. These fees are always paid by plan participants.
- Advisory Fees: Fees paid to a registered investment advisor (RIA) or commission paid to a broker. Advisory fees can also be paid by the employer and/or passed back to the plan participants.
Having an established process to consistently review the plan’s fees is a recommended best practice. For example, the Marsh McLennan Agency (MMA) Financial Services team leverages a total cost analysis (TCA) tool which clearly illustrates each fee associated with the retirement program, both on an investment and plan level, as well as how those fees are being assessed. This TCA is reviewed with the employer and plan fiduciary at each plan review meeting.
2. Benchmark your plan vs. industry averages.
Once you have a clear understanding of your fees, we recommend establishing a documented process that benchmarks your plan’s fees. One approach is to benchmark your plan’s fee vs. industry averages. When benchmarking, it’s important to ensure you’re comparing your plan to similarly sized companies, since industry averages can vary significantly depending on the size of your employee base and your plan assets.
It’s equally important to ensure you’re benchmarking all fees, not just the total plan cost. As identified above, you should consider benchmarking the plan’s investment expenses, administrative costs, and advisory fees against a band of similarly sized plans within each specific expense category to yield a percentile of how your plan ranks with relation to its peers. This practice directly illustrates whether a program’s fees are in line with what’s considered normal or standard for a comparable sized plan and, if needed, where improvements can be made. As a best practice, we recommend conducting this analysis no less than once per year.
3. Obtain competitive quotes from the marketplace.
Whereas benchmarking your plan vs. industry averages can provide a good indication of the fee competitiveness of your retirement plan, the best approach to determine how reasonable your plan fees are is to market your plan. With this approach you’re obtaining competitive pricing and bids based on your specific plan’s design, features, demographics and/or investment lineup. During this process you can accurately compare your plan’s fees to competitors in an apples-to-apples format. At a minimum, we recommend marketing your program every two to three years. It’s important to note that this marketing doesn’t have to be based on a desire to change providers, but rather to gauge the market’s average costs and services and to provide a baseline of comparison for what you’re currently paying and receiving. This helps ensure you have a clear understanding of where your pricing is compared to the marketplace.
In following these three steps, you’re aiming to fulfill fiduciary responsibilities and establishing a strong process from which you should be able to determine whether your plan is not only cost-effective, but also meeting industry standards. Our team incorporates thorough documented processes to assist employers with weighing services against costs to help ensure a competitive program and reasonable fees. To learn more, please contact an MMA advisor.