Life is full of indispensable items that require regular maintenance and renewal. You know you’re supposed to change your mattress every 10 years, the batteries in your smoke alarm every year, and the oil in your car every 7500 miles. And if you’re a plan sponsor or fiduciary, you know you should benchmark the costs of your company’s retirement benefits plan yearly. Yearly, but with an asterisk, because a benchmarked plan isn’t a bulletproof plan.
Benchmarked Doesn’t Mean Bulletproof
Plan sponsors and ERISA fans know that benchmarking is the process of comparing your company’s defined contribution plan to the industry standards across multiple metrics. Factors like investment expenses, administrative expenses, participation rate, and percentage of employer match are all analyzed. But it’s expenses and fees that are a nearly universal concern for plan sponsors. More than 90% of plan sponsors benchmark yearly, according to an industry study, and 90-100% of them consider expenses the most important metric to monitor and adjust.
Plan sponsors who benchmark yearly, and whose expenses are pronounced ‘reasonable’, still may not be immune to liability for excessive and hidden fees coming out of participants’ pockets. Just because your plan is benchmarked against others the same size doesn’t mean you’re not paying fees you shouldn’t pay – these buried fees are built into your plan by the plan provider. They aren’t benchmarked because they’re hidden in one of the categories that isn’t part of the evaluation.
Industry Giant With Excellent Reputation
A company whose plan I recently evaluated is a perfect example. About ten years ago, an advisor set their plan up with a giant in the industry, [Industry Giant With Excellent Reputation], with plan assets of about $10 million, a standard fee structure, a wide variety of funds and four share types on offer. The company thrived over the last decade and is currently about three times the size it was when the plan was first launched. The plan assets grew accordingly, and their plan now has about $30 million in assets. The plan sponsors have benchmarked regularly, and they fall within the industry standard range for reasonable costs. And yet, my analysis revealed some shocking facts that leave these diligent plan sponsors open to complaint.
First, the cost structure for this plan hasn’t changed in ten years. None of the fees or percentages have changed even though a $10 million plan doesn’t cost the same to administer as a $30 million plan. In the same way that the phone company isn’t going to call you to tell you that your bill went up but there are discounts that would apply, and you don’t even need to ask for them, [Industry Giant With Excellent Reputation] isn’t going to tell you your costs should be renegotiated. You definitely take notice when your monthly phone bill jumps 50%, but you can’t see what you could be paying in plan fees, without some expert help.
Second, while the administrative, record-keeping and advisor fees all fell within the industry standard, a closer look at the share classes and the basis points charged to each participant told a different story. Many of the funds that this company’s plan offered bore a fee of 25 basis points (or 0.25%) on each dollar each year. This kind of fee isn’t measured in benchmarking, as it’s neither administrative nor investment related. What’s worse is that this fee wasn’t paying the advisor, and it wasn’t going back into each participant’s account as a rebate – it was going directly and only to [Industry Giant With Excellent Reputation]. Just because.
Is Your Advisor Also Advocating For You?
Sometimes, plan providers will attach basis points to share classes on small plans that are just starting up, to cover the costs of a new, smaller plan. In the early years of this plan, this may have been reasonable. But continuing to collect basis points ten years later, when plan assets have tripled, standard fees are being paid as a percentage of assets, and the plan advisor is also paid separately isn’t reasonable or acceptable. Unfortunately, neither the advisor nor [Industry Giant With Excellent Reputation] have fiduciary responsibility in this case, and little incentive to shake things up. The plan sponsor is responsible for the years of basis points that were not reinvested back into the participant accounts holding those share types.
Benchmarking Isn’t Enough
Benchmarking a defined contribution plan is important and valuable – but for plan sponsors, it’s not enough. Your company’s plan may look fine from the outside, but there are hidden fees that benchmarking doesn’t reveal. ‘Built-in’ expenses cost your participants their money, and they’ll never get reduced unless someone advocates for you or negotiates them down. The plan provider won’t volunteer to reduce your costs, but your advisor should take that on. If your advisor isn’t fiduciary, they don’t have an obligation to do it, and they rarely will – unless you, the personally liable plan sponsor, prompt them.