Determining Fee Reasonableness of a Retirement Plan Recordkeeper

The determination of reasonableness of fees has always been a core fiduciary function for ERISA plan sponsors. ERISA Section 408(b)(2) regulations increased scrutiny on this responsibility.

The Department of Labor (DOL) has taken this step to solidify specific requirements for plan sponsors and service providers, regarding communication of fee information.


The genesis of these regulations is found in proclamations by Phyllis Borzi, Assistant Secretary of the Employee Benefits Security Administration (EBSA) (the enforcement arm of the DOL). It is Borzi’s contention that the monitoring of reasonableness of fees, services and contracts is not being adequately accomplished by plan sponsors. As a result, 408(b)(2) regulations now require that plan sponsors (fiduciaries) receive explicit and transparent documentation of all aspects of fees and expenses relating to services rendered by plan service providers. The focus of this article is on these regulations as they pertain to a plan’s recordkeeper (who also facilitates access to a plan’s investment options).

Progress Assessed

This well intended action by the DOL has not proven to be the panacea intended, partly because the regulations offer no definition for “reasonable.” Also, many plan sponsors may have misunderstood the full intent of the DOL by assuming that mere receipt and review of this data fulfills their obligation. This is not correct. Included in these regulations is the very specific responsibility for plan sponsors to use this fee data to document the process and result of their determination of reasonableness of fees, services and contracts.

The impact of Borzi’s contention of nonperformance by plan sponsors is convincingly borne out of recent litigation where reasonableness of fees and services played a significant role. Court cases (Tussey v. ABB, Beesley v. International Paper, and several others pending) generated awards/settlements in the $30M plus range against plan fiduciaries. Increased litigation activity is all but assured by Borzi’s declarations and ensuing 408(b)(2)’s statement of  fiduciary responsibilities. Now that 408(b)(2) has provided fiduciaries with explicit instructions regarding their responsibilities, there is no excuse for nonperformance. This is welcomed news for class action law firms already active in this area.  One firm specializing in fee related fiduciary breach litigation is reported to have already generated $175M in revenue over the past few years.

Based on off-the-record conversations with DOL representatives it appears they took a “wait and see” attitude during the first year of implementation to assess service provider and plan sponsor reaction. In year two, which began January 1, 2014, the DOL advises to expect increased audits and potential penalties for non-compliance. Some independent auditors have already begun asking questions during the annual plan audit as to how plan sponsors are responding to these regulations and are reporting their findings to the DOL in their annual audit filings.

Determine Fee Reasonableness

To make this determination of reasonableness, it is necessary for the plan sponsor to review the 408(b)(2) disclosures provided by plan service providers and develop a clear and demonstrable working knowledge of its plan fees and components.

Defined contribution plan fees fall within three major categories: investment management, administration and advisory. Pure investment management expense is always paid by the participant and is deducted from investment return. Administrative expense and advisory fees can be shared with or paid by participants, the plan or the company. In many cases all are combined into a single asset based charge. Included in this combined charge may be a revenue sharing component, which should also be reviewed for reasonableness.


A plan sponsor can take the next step, which is to initiate a Request for Proposal (RFP) from competing recordkeeper providers. The process of soliciting and analyzing provider quotes is not a simple task and should be accomplished with the assistance of an expert. This analysis is not as simple as comparing fees and “doing the math”. There are many ways a provider can create the illusion of lower cost. Remember the definition of prudence under ERISA is a heightened one of “prudent expert” requiring appropriate and documentable expertise. The DOL’s expressed concern is that a non-expert, however well intended, “may not know what they don’t know.” Also, ERISA’s procedural prudence process must be followed, as with all significant fiduciary decisions.

RFP responses must include an explicit and transparent statement of all fees and expenses, any restrictions, all services with contracts and investment assumptions in order for the fiduciary to be able to document an equitable comparison and determination of reasonable expenses.

Investments offered to participants should be predicated on plan goals and participant demographics. Note, the DOL recently provided specific guidance on how target date funds should be selected and monitored. These should not be ignored when undertaking an RFP & benchmarking of plan fees.

Prudent Fiduciary Action

As plan fiduciaries review the offers of recordkeepers, they should understand that the DOL made clear that the fiduciary is under no obligation to select the lowest priced provider. Rather, there should be a comparison of services, investment opportunities and other factors along with price. The general consensus in the ERISA community is that a price should be achieved within the range of the bidders. If an incumbent provider is priced high, they are typically willing to negotiate their fee to achieve fiduciary comfort.

Once this RFP exercise is complete and fee reasonableness and its process is documented, it should be followed up with an annual fee benchmarking. Another full RFP should occur every three to four years, or upon significant growth in assets. Whenever a change in provider is considered, a full RFP should be performed to document competitive comparisons.

An engaged fiduciary working with a quality independent consultant will have no difficulty discharging this important and liability mitigating responsibility.

­401(k) Advisors (c) 2014. All rights reserved. 401k-2014-136

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