Understanding Retirement Plan Fiduciary Responsibilities – III of III

“Monitoring and Fees”

andrew platou snyder cohn cpa business advisors washington dc maryland virginiaHiring a service provider is a fiduciary function and an employer should document its selection and monitoring process. When considering which service provider to hire, the employer should provide each with complete and identical information about the plan and what services it is requesting so that the employer can make a meaningful comparison. An employer should ask each provider for information about the firm itself, including financial condition, and experience with retirement plans of similar size and complexity. Information about the quality of the firm’s services, including the identity, experience, and qualifications of professionals who will be handling the plan’s account, any recent litigation or enforcement action taken against the firm, and the firm’s experience or performance record.

Fiduciaries are also required to monitor the service provider.  An employer should establish and follow a formal review process at reasonable intervals to decide whether to continue using the current service providers or look for replacements. When monitoring service providers, the employer should review the service providers performance, read any reports they provide, check actual fees charged and follow up on participant complaints.

Fees are just one of several factors fiduciaries need to consider in deciding on service providers and plan investments. When choosing service providers and plan investments, fiduciaries need to consider whether the fees are reasonable, particularly if they are paying the fees out of plan assets. Fiduciaries should continually monitor the plan’s fees and expenses to determine that they remain reasonable. While the law does not specify a permissible level of fees, it does require that fees charged to a plan are “reasonable.” Employers should ask prospective providers for a detailed explanation of all fees associated with their investment options and document the comparison and decision to hire a provider. Some service providers may receive additional fees from the investment vehicles offered under an employer’s plan. For example, mutual funds often charge fees to pay brokers and other salespersons, and these fees might be paid to the service providers. A service provider may also receive sales and other related fees for the investments they offer. Employers should ask prospective providers for a detailed explanation of all fees associated with their investment options.

More and more employers are offering participants help with making informed investment decisions. This may or may not be a fiduciary function, depending on the type of information provided. Employers may decide to hire an investment adviser to offer investment advice tailored to individual participants. These advisers are fiduciaries and have a responsibility to the plan participants. However, if an employer or service provider provides general financial and investment education that is general in nature, it is not acting as a fiduciary. This may include interactive investment materials or information based on asset allocation models. The decision to select an investment adviser or a service provider offering investment education is a fiduciary action and must be carried out in the same manner as hiring any plan service provider.