Avoiding 401k plan fee lawsuits requires a measure of discipline and diligence according to several industry experts.
401k plan fees continue to be the epicenter of retirement plan litigation. Plan sponsors are given a wide measure of latitude under ERISA as to how to allocate associated plan fees, but those allocation choices often may carry significant consequences if they do not conform to the basic principle of being “solely in the best interest of participants.”
That guiding principle of being solely in the interest of participants does not mean that employers are bound to search for the cheapest fees from providers; it means that they are required to ensure that fees are reasonable. “Reasonableness” and cheap are not the same thing under ERISA, and plan sponsors should understand the nuance. Kameron Jones, and RFP (request for proposal) Specialist at NFP Retirement states:
Under ERISA, employers — as plan fiduciaries — must ensure that only reasonable expenses are being paid by plan participants. This process should be comprehensive, measurable and documented with care, skill, prudence and diligence.
But before determining the “reasonableness” factor of fees, it is important to set a framework for fee structure. This framework is addressed. Jones offers the following guidelines to understanding plan fees:
- What am I buying?
- How much does it cost (investment, administrative and advisory services)?
- Who is going to pay (participants and employers)?
- How are they going to pay?
- What model is best for us?
The answer to how the fees will be paid can be especially tricky as there are a number of complex options including variable revenue sharing, level revenue sharing and zero revenue sharing.
According to Fred Barstein, Editor-in-Chief at 401kTV, revenue sharing plans should be eliminated from DC plans altogether because they obscure transparency, give rise to conflicts of interest and are inherently unfair.
In determining reasonableness, Jones suggests:
- Once per year: Do a general benchmarking of fees
- Every three years: Roll out a specific benchmarking of fees and investment opportunities to the marketplace, and
- Every six years: Establish and follow a prudent process.