Do you know how much your retirement plan costs?
The Employee Retirement Income Security Act of 1974 (ERISA) obligates plan fiduciaries to defray reasonable expenses of administering the plan, yet surveys show that many employers do not really know what fees they are paying for the plan, have not reviewed fee disclosures in the last year, and haven’t benchmarked their fees. This seems like a lawsuit waiting to happen.
If you’re unsure about this requirement, ERISA states in its “Prudent man standard of care” that
“a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of: providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan.” (§1104(a)(1)(A))[1]
Unless you have named a 3(38) investment manager fiduciary to bear some of the liability then you, the plan sponsor, are the plan fiduciary. You have the burden of defraying reasonable expenses. In considering this obligation, two questions come to mind:
- Do you know what you are paying for your plan?
- If you do know, how do you know it’s reasonable?
Many plan sponsors don’t know what they’re paying in fees
If you aren’t sure what you’re paying in fees, you are not alone. A 2018 survey by The Pew Charitable Trusts’ retirement savings project[2] indicated that 34% of plan sponsors were “not at all familiar” with the plan fees.
The same survey also indicated that 44% of plan sponsors had not read the plan fee disclosure in the past year. Your plan documents disclose your plan expenses. If you don’t know what they are or are having difficulty understanding your plan documents, finding help is imperative.
Many plan sponsors don’t know if the fees are reasonable
Knowing the fees is not enough, however, a fiduciary must know that the fees are reasonable. So even if you know what your plan expenses are, what are you doing to benchmark those expenses to know if they are reasonable?
A 2020 survey of plan sponsors by the Hawaii Employers Council[3] indicated that only (38.5%) had completed a fee benchmarking exercise, and only (7.7%) of participating organizations planned to do so. Fee benchmarking is clearly an area of that needs action by most plan sponsors and yet the trouble is that few are equipped with the expertise or tools to perform this exercise.
A 3(38) investment manager can help you understand your fees and benchmark them so that you will know if they are reasonable.
Not knowing your plan fees and if they are reasonable or not is a breach of fiduciary duty as spelled out in ERISA. High fees can also have real financial impacts on workers’ long-term retirement savings balances.
What can you do?
If you are a plan sponsor and find yourself in the dark about your plan fees, now is the time to act. You are legally obligated as the fiduciary and may even be personally liable for a breach of this duty. One of the best ways to take action is to engage a 3(38) investment manager. A 3(38) investment manager not only provides advice but has discretion over investment selection, developing an Investment Policy Statement, benchmarking fees, and other services. A 3(38) investment manager acts as a plan fiduciary, relieving the plan sponsor of significant liability.
If you’d like to know what you’re really paying for your current plan, give us a call. We will run an analysis of your current plan and let you know exactly what you are paying. Additionally, we’ll let you know if your current fund choices are well diversified and if any of them are invested in business practices that might contradict your values.
Beacon Wealth Consultants also acts as the 3(38) investment manager for the 401(k) and 403(b) plans we manage: the Kingdom(k) and Kingdom(b). So, if you’d like to offer your employees a plan that you’re proud of, let’s talk!
[1] https://uscode.house.gov/view.xhtml?path=/prelim@title29/chapter18/subchapter1/node552&edition=prelim
[2] https://www.pewtrusts.org/en/research-and-analysis/articles/2018/05/07/many-small-business-leaders-express-limited-knowledge-of-retirement-plan-fees
[3] https://www.hecouncil.org/news/2021/02/25/main/hec-releases-2020-retirement-plans-survey-highlights/