In today’s retirement landscape, it is an unfortunate truth that your employees’ retirement savings can be eroded, unbeknownst to them, by the amount of fees they are paying. This is why it is crucial, as a plan fiduciary, to evaluate the 401(k) plan and its costs on a regular basis. By taking that step and using a reliable benchmarking process, you will assess the reasonableness of fees while also evaluating the relative value for the fee you are paying. The overall goal here is to mitigate fiduciary risks while providing your participants with the tools and resources necessary to succeed in retirement.
In today’s retirement landscape, it is an unfortunate truth that your employees’ retirement savings can be eroded, unbeknownst to them, by the amount of fees they are paying. Based on a study by AARP, 71%, of 401(k) participants thought they weren’t paying fees for their plan1—which is clearly incorrect. This is why it is crucial, as a plan fiduciary, to evaluate the 401(k) plan and its costs on a regular basis. By taking that step and using a reliable benchmarking process, you will assess the reasonableness of fees while also evaluating the relative value for the fee you are paying. The overall goal here is to mitigate fiduciary risks while providing your participants with the tools and resources necessary to succeed in retirement.
First, we must understand what the responsibilities are as a plan fiduciary and how this pertains to fees. But who is considered a fiduciary? This is primarily driven by your actions as it relates to the plan itself.
You are considered a fiduciary if you are:
- Named as one by the plan
- Render investment advice for a fee
- Have any discretionary authority or responsibility in the administration of the plan
- Exercise any discretionary authority or control respecting the management of the plan or its assets
These actions can be as simple as deciding who the record-keeper will be, approving loan/distribution requests, or assisting in the investment decisions. If you fall into the fiduciary category, ERISA requires you to act in the best interest of plan participants, follow plan documents, diversify investments, pay reasonable expenses for administering the plan and investing its assets, and act how a prudent person would. In the instance you fail to follow any of these guidelines, fiduciary breaches will occur and potential litigation could follow. Since there have been an increasing number of litigations that are occurring in today’s world, mostly around funds and fees, it is important to be diligent about adherence because you could be held personally liable.
Here are a few of the most recent lawsuits:
- Philips North America, $17M settlement. Caused by excessive investment management and administration fees and retaining the Vanguard Prime Money Market as the sole capital preservation option considering its incredibly low yield.
- University of Chicago, $6.5M settlement. Caused by imprudently selecting and maintaining certain investment options, improperly paying excessive recordkeeping and administration fees, and failing to prudently monitor TWO of the plans investment options.
- Since 2016, Duke University, John Hopkins, the University of Pennsylvania, Vanderbilt, MIT, New York University, Yale and Columbia have all become subject to similar lawsuits.
The most common occurrence in these cases is the failure to evaluate and maintain processes to ensure fees are reasonable and performance is acceptable. So how can you avoid wandering into this realm of fiduciary trouble? It is actually quite easy. ERISA makes it clear that just having a process in place and diligently following said process matters more in choosing investments than the outcome itself.
The very first step to take, if you are not an investment expert, is to hire one. This expert in the field is a Registered Investment Advisor and will typically share in the fiduciary responsibility pertaining to the investments. They will help create an investment policy statement that provides you with a process of how the investments are evaluated, analyzed and changed. In addition to this, they will help you benchmark the plan to ensure fees are reasonable, not just for the investments, but also for recordkeeping.
Lastly, by simply acting in the best interest of plan participants and following the established processes and procedures, you ultimately provide them with what matters most; a real chance at the retirement they deserve.
