Chances are good that if you are a plan sponsor with 100 or more employees, yes, you are paying more than what’s considered efficient. Read on for the results of an analysis of thousands of Form 5500 filings by Abernathy Daley 401k, along with pointers for regular benchmarking.
Overpaying Administrative Fees
Plan Sponsor reports that Abernathy Daley 401k Consultants have found that “nearly 80% of sponsors with at least 100 employees are overpaying on administrative fees for their 401(k) and 403(b) plans.” The analysis of the Form 5500 filings of 6,566 companies underscores the risks of failing to adequately benchmark fees:
The data suggest that companies have not performed independent benchmarking on their corporate retirement plans, leaving them exposed to excessive costs and potential compliance risks. Over the last three years, retirement plan fees have decreased, yet a significant portion of organizations have not realigned their pricing structures accordingly…..
Administrative fee pricing typically depends on the number of employees and the total assets managed under the plan. Abernathy Daley’s report advised that companies paying more than 0.3% in administrative costs, based on total assets, are likely overpaying by tens of thousands to hundreds of thousands of dollars annually. This overpayment can severely impact both the employer and employees’ retirement savings.The lack of regular compliance-related benchmarking has also raised concerns about legal exposure and best practices adherence, according to the New York-based consultancy, which provides advice on 401(k)-plan administration and employee education.
The Department of Labor (DOL) also reminds us that benchmarking is an ongoing responsibility of plan sponsors, and explains:
Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable…..As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, investment options made available to the plan’s participants and beneficiaries,and the persons providing services to your plan. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary’s responsibility. This responsibility is ongoing. After careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided.
In addition to following the DOL benchmarking guidance, plan sponsors may find these tips on 401k benchmarking helpful, noting in particular that “setting and forgetting” is not a best practice when it comes to ensuring that the retirement plan remains focused on the value provided to participants:
The retirement plan your company initially started with may not always be a good fit in the long run. Benchmarking is the process of evaluating if a retirement plan’s services and fees are competitive with other plans of a similar size or type. To ensure compliance with ERISA guidelines, it’s smart for plan sponsors to benchmark fees annually….What to benchmark:
- Plan fees
- Participant fees
- Services you receive for these fees
….Because plan sponsors must document that they’re acting in the best interest of the plan, benchmarking can help ensure you’re doing your due diligence. It also limits fiduciary liability by: 1.Confirming you are getting the best services and fees possible. 2. Certifying your plan is competitive….3. Ensuring your plan still achieves the objectives of your participant’s financial goals.
Of course plan sponsors who implement robust benchmarking protocols not only mitigate the legal risks associated with excessive fees under the high standards of ERISA, but also, protect employee savings—and measurably improve retirement outcomes.While conducting due diligence to benchmark plan fees, it’s also essential for plan sponsors to update protections for themselves. It’s common to outsource administrative and investment services, but as fiduciaries, sponsors remain responsible (and personally liable) for ensuring that participants fully benefit from the plan. Unforeseen challenges arise all the time for plan sponsors, and seemingly small oversights trigger costly ERISA regulatory action and litigation. In fact, the average ERISA claim costs ordinary businesses over $1.2 million in legal fees.
That’s why Colonial Surety offers a cost-efficient Fiduciary+Cyber Liability Insurance package for plan sponsors. Armed with this coverage, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be protected with defense costs and penalty limits up to $1,000,000.
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