Retirement plan expenses have been top of mind for the Department of Labor (DOL), plan participants and the law firms that represent those participants. The DOL has publicly commented that plan fiduciaries are responsible for protecting participants from overcharges for plan services. In addition, civil litigation has focused on the issue. A class action lawsuit was filed against Caterpillar alleging that employees and retirees in its 401(k) plans were overcharged by potentially millions of dollars — the first such action brought against a Fortune 100 company. Much of the literature about retirement plan expenses is fairly technical, involving the arcane world of fee structures. All these factors support the need for risk guidance for middle-market plan sponsors.
What you can do
Plan sponsors can manage risk, without taking on excessive new costs, through actions including the following:
1. Pay attention to formal plan governance.
The most common source of information about fiduciary decisions for the DOL and litigants is the records of a plan’s governance committee (called the retirement plan committee or something similar). If the committee isn’t very active or if detailed records aren’t kept about how the committee reached decisions that affected plan expenses, it can be difficult to defend why and how the committee approved one investment election over another (or one plan vendor over another) when the one selected isn’t the least expensive. To manage the risk, the committee can do the following:
2. Know who is a plan fiduciary (and who isn’t).
- Meet regularly. Committees that meet only infrequently or sporadically may appear unconcerned about the plan operation.
- Consider committee composition. Aside from HR staff and employees interested in investments, who should be on the committee? Think about whether to include a rank-and-file employee, a member of the board and other stakeholders.
- Keep detailed minutes. The usual rule applies: If something isn’t recorded at the time it happened, it didn’t happen. Contemporaneous records of how the committee reached its decisions are by far the most effective way to demonstrate that when the committee made decisions, it was acting in good faith and in the participants’ best interests.
- Highlight expense considerations in investment and other decisions. The committee minutes should show that the committee considered costs as an important factor in selecting investment funds for the plan, for example.
- Formally review plan expenses regularly. Plan expenses can be benchmarked just as any other aspect of retirement plan operations, and periodically obtaining a formal review from an objective provider is considered a leading practice.
Plan sponsors are often surprised to learn that most or all of their plan vendors don’t consider themselves fiduciaries to the plan. Since the DOL holds plan fiduciaries responsible for plan expenses and because the fiduciaries are liable to participants for such decisions, it’s important to know whether vendors have skin in the game or whether the sponsor stands alone to account for decisions affecting the plan’s expenses.
3. Consider whether you have the right advisers
. Investment advisers will often address the expenses involved in various plan investment alternatives, but they focus primarily on investment return net of expenses, and expenses are significantly more nuanced than that. Shared revenue (the “hidden expenses” addressed in the DOL’s disclosure regulations) is also a concern, as is whether the plan is getting value for the cost. You may wish to consider whether to retain an adviser, even occasionally, to review plan expenses from the perspective of the DOL and the participants. There are advisers who specialize in fiduciary risk management, and accounting firms and law firms also provide these services.
4. Regularly review prior decisions.
Court cases and DOL rulings are a constant reminder that the decision to keep a vendor or an investment alternative is as important as the initial decision to retain them. While this may be understood regarding plan investments, decisions about plan expenses are often not treated the same way. It’s also important to document why a vendor or an investment is continued in light of the expenses involved. This review can be part of the overall review of an investment alternative, but cost consideration should be highlighted and documented in its own right.
5. Communicate with participants.
While the DOL’s disclosure regulations are designed to inform participants about the specifics of plan expenses, sponsors must also be open and proactive with participants about the plan’s expenses. Sponsors may be reluctant to discuss plan expenses because they’re concerned that employees may ask that the expenses be paid by the sponsor rather than out of their pockets. Such concerns shouldn’t stop the plan sponsor from being open about plan expenses decisions. Clear, matter-of-fact communications from the sponsor greatly help to reassure participants that the sponsor is doing its best to provide a robust retirement plan while controlling the costs of sponsoring a plan.
6. Understand that optics count.
An interesting detail in the Caterpillar case was that some of the funds offered under the plan were advised by a wholly owned subsidiary of Caterpillar. Although such an arrangement can be structured without violating the prohibited transaction rules (there was no allegation that Caterpillar had violated the law), this arrangement clearly gave the appearance of double-dealing and conflict of interest. In the settlement, Caterpillar was forced to drop the arrangement. Sponsors should likewise consider whether any of their arrangements may give the appearance of not just conflict of interest but also of neglecting the plan or failing to consider participants’ interests first and exclusively. For example, allowing the spouse of the CEO’s cousin to provide brokerage services to the plan may be technically legal, but it nevertheless may give the appearance that the plan is being operated at least partly to benefit the CEO’s family.
Most of the recommendations in this article are less about incurring additional costs than about being proactive and paying attention to how the retirement plan is operated. Plan expenses are an area where risk can be managed without going out of pocket in a material way, and sponsors should consider the return on investment from taking steps to reduce risk now compared to the potential costs of a DOL enforcement action or a participant lawsuit.
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