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Three Not So Simple Words = 90% of 401(k) Litigation

In part two of my conversation with Jason Roberts, we explore how conflicts, compensation and reasonableness account for 90% of recent 401(k) litigation. To help employers with those three issues, this episode drills into selecting and monitoring 401(k) service providers, a key fiduciary responsibility and one that is often misunderstood by plan sponsors. Below are my notes from our discussion.

  • Very few companies, large or small are great at selecting and monitoring service providers

  • In contrast, many companies get a 9 out of 10 or 10 out of 10 when it comes to monitoring plan investments.

  • You don’t see DOL regulators scrutinizing the performance of investment funds, they are more focussed on whether the fees and compensation are reasonable in light of the value received.

  • Learning opportunities from recent 401(k) cases:

  • Review types of expenses that are being paid out of plan assets, i.e. payroll or other corporate services

  • Excessive fees being received by service providers, review fees in light of plan growth to determine ongoing reasonableness

  • If using an ERISA Account or a Expense recapture account, ensure you monitor the funds in that account

  • ERISA section 408(b)2 says that Plan Administrators may authorize expenses to be paid by plan assets if they are necessary and reasonable.

  • A big part of determining fee reasonableness comes from determining what is necessary for your employee population.

  • Consider a needs assessment to help substantiate the menu of services you are offering your participants. If you are offering high touch, high cost services, it could be deemed that these fees are not necessary and then by definition not reasonable.

  • Once you have determined the concept of “necessary”, reasonableness should be determined in relationship to value.

  • Value can be determined by evaluating six factors/questions. What is the:

  • nature

  • scope

  • frequency

  • background

  • experience

  • credentials of a service provider.

  • RFPs and fee benchmarking reviews are reports that should be part of a grander process to determine fee reasonableness, not the entire answer.

  • Key question to ask: Is the total compensation received by a service provider reasonable in light of the compensation they are receiving?

  • Your fiduciary duties are to act solely in the best interest of plan participants, when determining and documenting value, document the needs of your plan participants and tie them to the services received and fees paid to deliver those services.

  • Questions or process differs slightly when you change gears to monitoring service providers.

  • When monitoring service providers:

  • Are licenses current

  • Insurance and bonding current

  • Meeting or exceeding service standards

  • Are they still meeting the needs of participants

  • Are services actually being delivered. Are you getting the contractual services you are paying for.

  • Were the fees actually charged to the plan or participant accounts the same as they were specified in the original fee disclosure documents.

  • Experienced consultants can help employers meet their ongoing fiduciary responsibilities to monitor service providers.

  • DOL says fees should be assessed “periodically” or “as needed”, interpreted that means roughly every three years.

  • The market is not so hypersensitive that fees will vary widely from year to year.

  • However, “as needed” should be evaluated as plan dynamics change. Things that could accelerate the need to evaluate plan fees:

  • Plan merger which increases size of plan

  • Change in fees

  • Change in level of services

  • Change in fiduciary status of a service provider

  • Determining fee reasonableness is a high risk but high reward process, if you have the right package of service, products and service providers you can drive better outcomes for both the plan and participants.

  • In determining the needs of participants, consultants can help evaluate what participants value in a plan.

  • Employee surveys can be valuable, should be geared toward how can we better serve you vs. what are our deficiencies.

  • You get what you pay for, experience and specialization can be valuable and can be worth a premium

  • Low cost at all cost as the base line of your fiduciary protection strategy can not be farther from the truth.

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