As you may be aware, multiple universities were recently named in class action lawsuits relating to their retirement plans. The lawsuits allege that the institutions, and more importantly, the named fiduciaries of the plan, breached their fiduciary duties by allowing excessive fees for investments and recordkeeping and engaging in multiple recordkeepers.
They also were criticized for using restrictive and underperforming investment options for extended periods. These lawsuits demonstrate that not-for-profit organizations are not exempt from scrutiny and need to focus on fulfilling fiduciary duties and monitoring plan fees and expenses.
Due to a lack of historical data, not-for-profit organizations sponsoring a qualified defined contribution retirement plan have a unique challenge in fulfilling mandatory Employee Retirement Income Security Act of 1974 (ERISA) requirements. In 2009, the Department of Labor (DOL) issued new legislation that identified 403(b) plan sponsors as fiduciaries and mandated that they regularly monitor their plan fees for reasonableness. This legislation has put many not-for-profit organizations at a disadvantage to meet the underlying requirements listed by the DOL and enforced through ERISA.
Alternatively, on the for-profit side, 401(k) plan sponsors have been required to monitor fees and expenses for decades. As a result, there is a plethora of data on 401(k) fees for plan sponsors to use to benchmark their plans. Because that data was not previously utilized by not-for-profits, it is more difficult to access on the 403(b) side.
As recent lawsuits have highlighted, plan sponsors must follow a prudent process for the selection, monitoring and replacement of plan investments and fees. The same now applies for not-for-profit organizations. Many plan sponsors need to quickly get a handle on benchmarking their plans. If they do not perform those duties, they run the risk of expensive lawsuits and damages. This information may seem intimidating, but developing a prudent process for monitoring fees is not as difficult as it may seem.
Break It into Steps
It is important to remember that plan sponsors do not need to have the least expensive plan; they simply need to offer a plan with “reasonable” fees and expenses. Plan fees change depending on investment choices and services offered, so plan sponsors must determine if the costs are reasonable for what is being provided to participants.
Do Some Research
The first step to determining reasonableness is to document all of the plan fees and how they are being paid in detail. To do this, the organization must determine what services are being provided and by which service providers. Services can include recordkeeping, participant education, advisory or consultant services, underlying investment fees and more. After identifying all costs, the plan sponsor needs to determine what the fees are and who is paying the fees—the participants or the organization.
Evaluate Your Fees
The second step is to benchmark the fees to determine reasonableness. There are a few ways an organization can benchmark its total plan costs. Plan sponsors can take the plan to market through a formal Request for Proposal (RFP) to see what competitors would formally charge or gather data by submitting a blind Request for Information (RFI) to alternate recordkeepers. Plan sponsors can also compare their plan fees to other similar plans using an industry benchmark.
Many 403(b) plan sponsors do not consider taking their plan to market for a formal RFP to see what alternate recordkeepers or vendors would charge. Even if you are happy with your current provider, it is imperative that you periodically take the plan to market to see what other recordkeepers would charge to service the plan. If fees are higher at the current recordkeeper than at competitors, you can use that data to negotiate better pricing or improved services with the current recordkeeper without having to move the plan.
A blind RFI is a similar process of gathering pricing from two to three alternate recordkeepers. The difference is that the plan sponsor is able to remain anonymous. Typically, this is leveraged by a consultant or third-party advisor so as to keep the institution’s information confidential to the marketplace.
A third way to benchmark the plan is to compare it to similar plans using survey data. The key to this step is using survey data from actual retirement plans that use similar services and are similar to your plan and organization in terms of key plan metrics, including: industry, types of plans, plan asset size and number of participants. This is where many 403(b) sponsors struggle. Due to the fact that benchmarking is a more recent requirement for 403(b) plan sponsors, there is a lack of available survey data. Some 403(b) plan sponsors have fallen back and used 401(k) survey data to benchmark the plan. The problem with using 401(k) data is that it isn’t a true comparison, and it can be difficult for the retirement committee to defend this process. In order to accurately determine reasonable fees and expenses, plan sponsors for not-for-profits should compare their 403(b) plans to other 403(b) plans.
Enlisting Outside Help
Often, 403(b) plan sponsors partner with an advisor to gain access to 403(b) survey data. Although it carries an additional cost in some cases, this can be a positive for the organization if the advisor can perform the benchmark and negotiate with the recordkeeper on behalf of the plan sponsor based on the benchmarking results. If your retirement committee is going to partner with an advisor to benchmark plan data, make sure that the advisor has experience working with not-for-profit organizations and has not-for-profit clients in similar sectors, with similar plan types and asset sizes to your organization. Ask advisors if they have 403(b) survey data and if they have performed the service previously. Reputable advisors will be able to provide you with references.
From a fiduciary governance best practice approach, it is vitally important for your organization to properly document any benchmarking process that is undertaken. This will reduce risk and provide evidence of completion of the fiduciary duty of overseeing plan expenses. Of equal importance is analyzing the results of the benchmarking process. If your fees are lower or the same price as peer organizations, then follow-up steps are to repeat the process every three to five years, as well as perform a simple annual evaluation to ensure that they remain appropriate. If your fees are unreasonable or higher than industry standards, the retirement plan committee needs to identify if that is justifiable. Are the participants receiving more services? Are the investments producing higher returns? If there is not a good reason for higher fees, the plan sponsor should negotiate for lower pricing.
Fortunately, as a result of increased scrutiny on fees and fee transparency, now is the optimal time to negotiate for better pricing, plans and outcomes for participants. Over the past ten years, there has been fee compression due to efficiencies built into plans, technology, competition and the increased industry scrutiny. This trend, along with the benchmarking data, gives the retirement committee sufficient leverage to negotiate with recordkeepers for more competitive pricing.
Benchmarking the plan is a very beneficial process for both the retirement plan committee and most importantly the participants. Determining the reasonableness of fees fulfills fiduciary duties thereby reducing organizational and personal risk for the retirement plan committee. Additionally, if plan costs are high, benchmarking the plan can save participants and the not-for-profit organization large amounts of money. Most importantly, over time, these savings can drastically help participants reach their personal retirement goals.
If you have any comments, questions or concerns, please contact us.
Mike Swallow is the Senior Vice President in the Cleveland office of CBIZ Retirement Plan Services. He can be reached at email@example.com or 216.520.6167.
Brad Sieniawski is the Vice President and National Not-For-Profit Market Lead of CBIZ Retirement Plan Services. He can be reached at firstname.lastname@example.org or 216.525.1946.
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