How Plan Fiduciaries Can Ensure a Retirement Plan Vendor's Compensation Is Reasonable

Ensuring that the fees paid to retirement plan vendors are reasonable in relation to the services provided is a critical responsibility for plan fiduciaries. Failure to meet this standard can expose you to legal risks and financial penalties under ERISA. However, with the complexities of fee structures and the variety of services offered, how can you determine that you’re getting fair value for your plan—and, more importantly, for your participants? The answer lies in a comprehensive process involving benchmarking, Requests for Information (RFI), and Requests for Proposal (RFP) [1] [2].

Start with 408(b)(2) Disclosures

The foundation of your assessment should begin with a review of the 408(b)(2) disclosures provided by your vendor. These disclosures should detail the services offered, the compensation received (both direct and indirect), and any potential conflicts of interest. Understanding these details is essential for evaluating whether the costs align with the value delivered [1] [2].

Benchmarking Against Industry Standards

Once you have a clear understanding of the vendor's fees and services, the next step is to benchmark these against industry standards. Benchmarking involves comparing your vendor's fees with those charged by other providers offering similar services to plans of comparable size and complexity. Industry reports, surveys, and resources such as the 401(k) Averages Book or data from retirement plan consulting firms can provide valuable insights. This step helps you determine if your vendor’s fees are within a reasonable range compared to the market [1] [2].

Conduct a Request for Information (RFI)

To further assess fee reasonableness, a Request for Information (RFI) can be invaluable. An RFI allows you to gather detailed information about the services, fees, and compensation structures from multiple vendors. By completing an RFI, you gain a deeper understanding of what other vendors are offering, how they price their services, and whether there are more cost-effective options available. This process enables you to evaluate whether your current vendor’s fees are competitive and justified based on the services provided [1] [2].

Obtain Competitive Bids with a Request for Proposal (RFP)

After gathering information through the RFI process, consider taking it a step further by issuing a Request for Proposal (RFP). An RFP allows you to solicit competitive bids from multiple vendors for the services your plan requires. By comparing these bids with the information gathered through benchmarking and the RFI, you can identify any outliers in pricing or service quality. Even if you choose to stay with your current provider, the RFP process can provide leverage for negotiating better terms and fees [1] [2].

Evaluate the Scope and Quality of Services

When assessing fee reasonableness, it’s crucial to consider not just the cost but also the value and quality of the services provided. The RFI and RFP processes help you evaluate whether the vendor offers comprehensive plan administration, effective participant education, robust investment options, and timely reporting. High-quality service may justify higher fees, especially if it leads to better outcomes for plan participants, such as increased engagement or improved retirement readiness [1] [2].

Consider the Plan’s Complexity

The complexity of your plan should also be factored into your assessment. Larger plans or those with specialized features, like custom investment options or non-standard vesting schedules, may require more sophisticated administration, which can justify higher fees. Conversely, if your plan is relatively simple, the fees should reflect that simplicity [1] [2].

Conduct Regular Reviews

Fee reasonableness isn’t something you evaluate just once. It’s essential to conduct regular reviews of your vendor’s compensation, ideally on an annual basis or whenever there is a significant change in services or plan structure. This ongoing diligence ensures that fees remain competitive and aligned with the value provided as both the market and your plan evolve [1] [2].

Document Your Process

Finally, documenting every step of your process is critical. Keep detailed records of your benchmarking efforts, RFI responses, RFP bids, service evaluations, and the rationale behind your decisions. This documentation serves as evidence that you acted prudently and in the best interest of your plan participants, protecting you in the event of any disputes or audits [1] [2].

In summary, determining whether a retirement plan vendor’s compensation is reasonable requires a comprehensive approach that includes benchmarking, RFIs, and RFPs, alongside regular reviews and thorough documentation. By following these steps, you can confidently fulfill your fiduciary duty and ensure that your plan’s resources are used wisely [1] [2].

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References

[1] John Hancock Retirement. (2021, July 8). A guide to 408(b)(2) fee disclosures for retirement plan sponsors. Retrieved from https://retirement.johnhancock.com/us/en/viewpoints/erisa--plan-design/a-guide-to-408-b--2--fee-disclosures-for-retirement-plan-sponsor 

[2] ForUsAll. (2023, October 16). 401(k) fee disclosures: A comprehensive guide to 408(b)(2) fee disclosures. Retrieved from https://www.forusall.com/401k-blog/401k-fee-disclosures 

[3] Schwab. (n.d.). *ERISA 408(b)(2) fee disclosure report*. Retrieved from https://www.schwab.com/resource/erisa-408b2-fee-disclosure-report 

[4] U.S. Department of Labor, Employee Benefits Security Administration. (2012). *Final regulation service provider disclosures under 408(b)(2)* [PDF]. Retrieved from https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/final-regulation-service-provider-disclosures-under-408b2.pdf 

[5] John Hancock Retirement. (n.d.). *ERISA 408(b)(2) and group health plans*. Retrieved from https://retirement.johnhancock.com/us/en/viewpoints/practice-management/erisa-408-b--2--fee-disclosures-not-just-for-your-clients--retir