The next level of retirement plan service and risk management is here: establishing fee policy statements for 401(k) plans. Financial advisers who specialize in retirement plans are finding new ways to distinguish themselves from their competitors, upping the ante in service. Specifically, they're helping to educate workers, increasing enrollment into the retirement plans and raising contribution rates.
But beyond those basics, forward-thinking advisers are looking at the fee policy statement — a document that spells out how fees ought to be allocated among all the players within a 401(k) plan — and helping their plan sponsor clients get the most out of it.
The fee policy statement answers several questions: Who is paying for the administrative cost of running the plan, the plan sponsor or the participant? Is there revenue sharing between the record keeper and the fund companies? If so, how are plan sponsors accounting for it? Finally, do the service providers restore any leftover revenue-sharing amounts after they've recouped costs and profits? If so, where are those dollars being held?
The document also details the plan sponsor's duties with respect to fee oversight — namely, how often the plan's fees should be reviewed.
“A fee policy statement focuses plan fiduciaries on the need to evaluate the fees being charged,” said C. Frederick Reish, a partner in the employee benefits and executive compensation practice group at Drinker Biddle & Reath. “It's not so much what the fee policy says in writing but the explanation that the consultant gives when it's brought to the table and how it's applied going forward.”
Growing interest in fee policy statements is an aftereffect of the Labor Department's 2012 emphasis on fee disclosure.
Advisers looking to do more for plan sponsor clients note that it's not enough merely to show employers the cost of services and benchmark them against the market. Plan sponsors want to understand the nitty-gritty of the fees and use any leverage the information provides.
“Clients already understand the fees they're paying to the record keeper and to us, as well as whether there are revenue-sharing arrangements or per-head fees,” explained Kathleen A. Kelly, managing partner at Compass Financial Partners. “What's become more of an opportunity for plan sponsors is to look at how the overall administrative costs of a retirement plan are more equitably distributed to ensure all of the participants are paying a similar portion of overall fees.”
At J.P. Morgan Retirement Plan Services, large plan sponsors are asking more about products that permit them to bypass revenue sharing altogether, according to Sarah Rasmuss, vice president of product development. Drafting and reviewing a fee policy statement could potentially drive such changes.
“Advisers can help plan sponsors understand the options for paying expenses, be it writing a check, debiting participant accounts or using revenue share to offset fees or to level the fees,” Ms. Rasmuss said. “They can lean on the service provider to articulate the options available when managing and reporting those fees.”
Advisers and plan sponsors also can use the discussion behind drafting a fee policy statement to determine how they should proceed when participants aren't paying the same amount.
“Say I'm in a stable-value account and it has the highest amount of revenue sharing, but another participant is in an index fund and it has zero revenue sharing,” said Randall Long, founder and managing principal at SageView Advisory Group. “Is it fair for the person who's in the index fund to pay none of the fees? The fee policy statement would speak on how to handle those issues.”
Experts in the Employee Retirement Income Security Act of 1974 warn that improperly drafted statements can present a litigation target.
Fee policy statements can be considered documentation that governs the operation of the plan, so failure to follow a statement can be a fiduciary breach, Mr. Reish noted. The solution: Allow the statements to give plan fiduciaries a little bit of slack.
He said the statements ought to clearly state that they are merely guidelines. Documents should say that the plan sponsor will obtain and review information from service providers on the compensation they receive and that the costs will be reviewed against market data, he said.
“Once it's in place, every year, the plan committee should review it, even if these are just guidelines,” he added.