ERISA SEC. 408(b)(2) FEE DISCLOSURE EVALUATION AND CERTIFICATION
“Fundamental to the ability of fiduciaries to discharge their [ERISA Sec. 408(b)(2)] obligations is obtaining information sufficient to enable them to make informed decisions about an employee benefit plan’s services, the costs of those services, and the service providers.” U.S. Department of Labor
Regulations under ERISA Sec. 408(b)(2) require plan sponsors to:
- Receive required disclosures from all Covered Service Providers;
- Use the disclosures to identify unnecessary or unreasonable services and costs and take action to eliminate or change them; and
- Report cost and service information to participants and respond to their inquiries.
To comply plan fiduciaries must adopt a documented, prudent analytical process that ensures that each service provider compensated from plan assets is performing services that meet three standards:
- Necessary for the establishment or operation of the plan,
- Pursuant to a reasonable arrangement, and
- The direct and indirect compensation paid to the service provider is reasonable.
The regulations provide that a fiduciary is prohibited from authorizing the plan’s payment of fees to a Covered Service Provider that fails to make the necessary disclosures. Such fees are deemed “unreasonable.” Accordingly, the plan’s payment of fees under such circumstances automatically exposes a plan sponsor to liability for breaching its fiduciary duty to avoid engaging in a prohibited transaction.
Many plan sponsors neglect to compare expected plan fees to a fee benchmark. Some rely on a fee benchmark obtained from a Covered Service Provider, or through an ad hoc Request for Proposal or Request for Information. Such fee benchmarking information is inherently unreliable and does NOT substantiate compliance with Sec. 408(b)(2). Most plan sponsors require the assistance of an independent, third party expert. ERISA Fiduciary Administrators has many years of analyzing vendor fees and services and is recognized by DALBAR, Inc. as an ERISA Sec.408(b)(2) ”Fee Disclosure Expert.” For more information about DALBAR, please click the Registered Fiduciary medallion at the bottom of this page.
Reliable fee benchmarking information must include more than a comparison of a plan’s expected fees to competitive fee levels for a “peer group” of plans. While that is an appropriate starting point, the analysis should also include adjustments for the scope, scale and quality of each vendor’s services. Raw “fee” benchmarking data promotes pure price shopping without considering the quality of services provided or the special features of a particular plan. Attempting to compare service providers in the absence of qualitative metrics promotes a cycle of continuously degrading services. In this cycle, the fees paid become the major focus in vendor selection and removal. Such a narrow focus creates a bias in favor of lower-cost providers. The competitive advantage of lower-cost providers puts pressure on their competitors to reduce the quality of their services to justify a reduction in their fees, with the result being generally lowered service levels. To avoid this outcome, the Plan Report Card process includes examination of each of the following categories:
- projected retirement income
- participation rate
- scope of services provided
- timeliness and accuracy of services
- quality of provider relationships and independence issues
- compliance assurance
- plan sponsor’s exposures to risk
Furthermore, a benchmarking analysis of a single plan is sensitive to the composition of the “peer group” of plans. In developing the right “peer group” attention must be paid to relevant variables, e.g. participant group size, total plan assets, number of investment fund options, industry classification, geographical location, etc. EFA and DALBAR have many years of experience in evaluating the appropriate factors for composing a valid “peer group” of plans.
SECTION 408(b)(2) COMPLIANCE REPORT AND CERTIFICATION.
EFA utilizes DALBAR’s “PLAN REPORT CARD” process to conduct an independent audit of the reasonableness of each service provider’s direct and indirect compensation, as well as the quality of its services, the reasonableness of the terms of its service agreement and its arrangements with other entities. The Plan Report Card is designed to provide the plan sponsor with a thorough report analyzing the fees the plan is paying and the quality of the services its is receiving, with recommendations for modification, where appropriate, and an independent certification of the responsible fiduciary’s compliance with Section 408(b)(2).
While some of the data and documents required for this process should be readily available, others must be extracted from service providers. This requires familiarity with a wide array of fee disclosure practices in the service provider industry. EFA will take the lead in obtaining all the data and documents from the plan’s service providers and then assist the plan sponsor in uploading this to the DALBAR’s web-based ”Plan Report Card” process.
At the conclusion of the report, EFA will meet with the plan sponsor to review the results of the “Plan Report Card” and discuss any recommended changes. This meeting will document that (1) the report was properly reviewed, (2) the certification was signed by the responsible plan fiduciary and (3) both were recorded in the permanent records of the plan as an evidentiary safeguard in the event of a future examination by the Department of Labor or to respond to excessive fee claims that may be brought by participants..