Retirement Plan Fiduciaries and Investment Fees: What You Don’t Know Can Hurt You

In April 2016, the Employee Benefits Security Administration of the U.S. Department of Labor (DOL) introduced new regulations regarding who is considered a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA).  Fiduciaries are legally and ethically bound to act in the best interest of those they are serving.  Under the new regulations, financial advisors to employee benefit plans, including stockbrokers, will now be deemed fiduciaries and therefore will be required to “give advice in the best interest of their customers.”  This includes offering investments that provide the lowest overall cost to financial planning clients, rather than investments that may make the financial advisor a higher profit, which as indicated by the regulations can “pose special dangers to the security of retirement, health, and other benefit plans because of fiduciaries’ conflicts of interest with respect to the transactions.”

The new fiduciary rule was scheduled to be phased in over a transition period of April 10, 2017 through January 1, 2018.  However, on February 3, 2017, President Trump issued a memorandum ordering the DOL to “prepare an updated economic and legal analysis” of whether the rule is likely to negatively impact investors and the financial industry, or potentially increase related litigation.   If the DOL concludes that any of these happen to be the case, it can propose a new rule “rescinding or revising” the regulation.  As a result of this action, the implementation of the regulation could be delayed or repealed.

Plan sponsors and trustees are already considered fiduciaries to their respective plans under ERISA, and can be held personally liable for plan misconduct or improper use of plan assets resulting from their actions.   Understanding investment fees and expenses is an important part of a plan sponsor and trustee’s responsibilities.  In recent years, there has been increased emphasis on fee disclosures and reasonableness of fee arrangements under ERISA Sections 404(a)(5) (Participant Disclosures) and 408(b)(2) (Employer Disclosures).  These ERISA rules require covered service providers (CSP) to provide plan sponsors, trustees and participants with all of the information they need to assess reasonableness of total compensation, both direct and indirect, received by the CSP, its affiliates, and/or subcontractors, identify potential conflicts of interest, and satisfy reporting and disclosure requirements under Title I of ERISA.

After careful evaluations during the initial investment selection process, it is imperative that a plan’s investment fees be monitored regularly for reasonableness to ensure that the plan is operating in the best interest of its participants.  Consider the following questions in evaluating the reasonableness of fees and expenses:

  • Have you given to each service providers complete and identical information with regard to your plan?
  • Have you decided which fees and expenses you will pay as plan sponsor, which fees your employees will pay, and which fees you will share?
  • Do you know which fees and expenses are charged directly to the plan and which fees are deducted from investment returns?
  • Do you know what services are covered under the base fee and what services incur an extra charge? Do you know what fees are for customized services?
  • Do you periodically benchmark your plan’s expenses against other comparable type of investment funds?
  • Do you understand that some investment options have higher fees than others because of the nature of the investment?
  • Does the service arrangement have any restrictions, such as charges for early termination of your relationship with the provider?
  • Does the service arrangement assist your employees in making informed investment decisions for their individual accounts (i.e., investment education, information on fees, etc.) and, if so, how are participants charged for those services?
  • Have you considered asking service providers to present uniform fee information that includes all fees charged?
  • What information will you receive on a regular basis from the service provider so that you can sufficiently monitor services being provided, investments selected and make any necessary changes? Are all fee arrangements in place for the plan in writing?

This evaluation process can often be time consuming and challenging for those lacking knowledge of the thousands of available investment options or current market conditions and outlooks.  Hiring a third-party investment advisor to regularly perform evaluations of plan investment performance and fee structures can be a beneficial method of providing safeguards against the types of plan misconduct and misuse of assets that could lead to personal liability for plan sponsors and trustees. You should document your periodic evaluation of the investment fees in trustee minutes to show that you are meeting your fiduciary responsibility to evaluating the investment fees being charged to the plan.

Regardless of the outcome of the DOL’s analysis of the pending new fiduciary regulations, plan sponsors and trustees will continue to have a fiduciary responsibility to ensure that their plans are operating in the best interest of plan participants and within DOL and ERISA regulations.  Now is a good time to take a closer look at your retirement plan assets to ensure that you are receiving the most advantageous investment options and fee structures possible.  Dannible & McKee, LLP would be happy to assist you with this process.  Please contact us with any questions you may have.