Lessons learned from 401(k) plan fee fiascos

With 401(k) plans becoming America's primary retirement savings vehicle, the role of plan fiduciaries is increasingly important. But there can be many challenges and pitfalls along the way. One of a plan fiduciary's key responsibilities is to ensure that the plan pays reasonable fees and to monitor these fees as arrangements are entered into and/or renewed. Failing to do so can constitute a breach. So how can plan sponsors en-sure positive outcomes for their participants while protecting themselves as fiduciaries (or the persons they appoint as fiduciaries)? A plan fiduciary's first step is to establish a thoughtful and prudent decision-making process. It's important to remember that decisions made with regard to a retirement plan should be in the best interests of participants, not for the benefit of the plan sponsor or service provider.

POTENTIAL BREACH OF DUTY

Losing sight of this fundamental principle potentially can lead to an action by participants for breach of fiduciary duty under the Employee Retirement Income Security Act. Such a claim can result in individual liability for the fiduciary, as seen in a recent class action in which a federal court found a plan sponsor liable for damages due to the pension committee's failure to monitor and control record-keeping fees, despite receiving notice that the fees were excessive and used to subsidize nonplan expenses. In that case, the pension committee members failed to follow the plan's Investment Policy Statement regarding the revenue-sharing arran-gement with the plan's record keeper. To prevent this kind of breach, I help clients review their IPS annually and document the basis by which investment funds are added or removed from the investment lineup. In addition, I recommend that sponsors (and/or the agents acting as the plan's fiduciary) monitor their plans' revenue-sharing models and keep a careful eye on all fees. Reviewing periodic benchmarking studies can help determine if a plan's fees continue to be reasonable and will ensure that there is no conflict of interest between the sponsor, the fiduciary (if other than the sponsor) and the plan's service providers. To make sure that the plan is matched with an appropriate record keeper, I encourage sponsors to conduct a request for proposals for record-keeping services every three to five years. With an aging workforce and longer life expectancies, plan optimization is becoming more important than ever to ascertain that participants are preparing for retirement. From staying on top of plan design trends to day-to-day communications with service providers, I know that this can be a daunting task. But sponsors don't have to handle it alone; professional retirement plan consultants can help sponsors navigate the complexities of their fiduciary responsibilities.

MONITORING

In addition to helping sponsors build out a process to execute the recommendations mentioned above, I also help my clients implement changes based on the findings, including negotiating with service providers for lower fees, monitoring plan investment options and reviewing critical plan documents, including ERISA-required fee disclosures and the plan's IPS. The consultants' job is to guide sponsors and help them determine steps that are both right for them as sponsors and right for the overall financial health of the plan, which ultimately benefits the plan's participants. They should aim to find solutions that work for the client's unique situation while never losing sight of what really matters: ensuring that their employees can achieve a secure retirement. Phil Fiore is senior vice president for investments at the FDG Group and an institutional consultant at UBS Institutional Consulting.