Retirement Plan Sponsors: Do You Know What You’re Paying For?

Plan Sponsor Fees - Ohio CPA Firm
Retirement plan service providers are compensated in a variety of ways – and often the fee structure can be complex. A complex fee structure makes it difficult for you to meet your fiduciary responsibility to pay only reasonable plan fees. Do you know what you’re paying for? Read on to find out.

Whether you are buying tickets to see your favorite musician in concert or your favorite team’s most anticipated game of the season, few things are more frustrating than getting hit with hidden fees at the ticket counter. It’s at that moment you realize that all the time and effort you spent planning and searching for the best prices was futile. Defeated, you reflect on the irony of paying the required convenience charges knowing very well that you’ve already committed to the purchase and a few extra dollars will not stand in your way. Sound familiar?

This scenario is common in many areas of our lives and, sometimes, the extra fees may even be hidden. Such is the case when your company sponsors a retirement plan for your employees. If you aren’t aware of the plan related fees, the service provider you hired may not have clearly reported its costs to you – or perhaps they have, but you have not read that information.

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How Much Is Too Much?

Retirement plan service providers are compensated in a variety of ways – and often the fee structure can be complex. A complex fee structure makes it difficult for you to meet your fiduciary responsibility to pay only reasonable plan fees.

If you don’t know the actual cost of plan services, how can you know if the price the plan is paying is reasonable? With respect to our analogy above, are you paying a few dollars in convenience charges or a lot more?

The numbers can get quite large when you consider plan fees are typically based on a percentage of plan assets, as plan assets tend to grow over time and fees recur every year. Not knowing the reason for higher fees could become the basis for a lawsuit for breach of fiduciary duty.

Are You At Risk?

The Department of Labor (DOL) is aware of this issue, which is why regulations went into effect in 2012 to help plan sponsors by requiring service providers to disclose their fees more clearly. Plan sponsors are now responsible for making sure they receive the required disclosures, and properly evaluate them for reasonableness. The process of evaluating fee reasonableness should be done every 3-5 years with an independent benchmarking study. Plan sponsors that don’t engage in this process can be held personally liable if the DOL later determines that excessive fees were paid by the plan.

Here are some basic questions and answers that can help you understand the fee disclosure regulations.

  • Which plans are impacted? This disclosure applies to all participant directed qualified retirement plans. It does not apply to SEPs, SIMPLEs, IRAs, and annuity contracts.
  • What information is required to be disclosed? The information required to be disclosed pertains to the fees that are paid by the plan to a covered service provider (CSP) – a CSP is one who enters into a contract or arrangement with a plan and who expects to receive at least $1,000 in compensation, direct or indirect, from that plan.
  • Who could be considered a CSP? A covered service provider could be a broker-dealer, a registered investment advisor, TPA (third party administrator) or a record keeper. Accounting, auditing, actuarial, third-party administration, legal, etc. service providers who receive indirect compensation (compensation from a source other than the plan or the plan sponsor) could also be considered covered service providers.
  • When is disclosure not required? The agreement and payment is between the plan sponsor and the service provider, which means that if the plan sponsor pays the fee(s) directly, disclosure is not required.
  • When must fees be disclosed? Fee information must be provided to the plan fiduciary annually. If a change is made to the information that was previously disclosed, a new, revised disclosure document generally must be provided within 60 days of the change. Note that annual disclosure is sufficient if the change is for investment-related changes.
  • What if the service provider’s CSP status is unknown? It’s good practice to request disclosures from all the plan’s service providers. If a particular service provider is not a CSP and no disclosure is required, they will communicate that information directly to you.
  • What if a CSP fails to provide disclosure information? If you provided the CSP with a written request for disclosure information and they fail to comply within 90 days of the request, you must notify the DOL.

Email Rea & Associates to find out how we can help you identify a prudent process for evaluating the fees you are currently being charged.

By Darlene Finzer, CPA, QKA, CSA (New Philadelphia office)