What is Fee Reasonableness?

There has been and will continue to be, heightened scrutiny on plan fees. Like most fees, there’s more to it than just the price.

Among other duties, fiduciaries have a responsibility Under the Employee Retirement Income Security Act of 1974 (ERISA) to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable. After a flood of excessive fee suits in the early 2000’s, 408(b)(2) or the Fee Disclosure Rule was passed in July 2012 requiring plan service providers to annually disclose plan fees in an effort to increase transparency and awareness regarding how expenses are being allocated.

2019 ERISA Class Settlements $449 MillionExcessive fees suits: $193 MillionAverage settlement: $12 MillionLargest settlement: Dignity Health $100 Million
Source: Bloomberg

The determination of “Fee Reasonableness” is a fiduciary obligation. Service Providers will be asked to explain or justify their fees and should include consideration of their Quality, Service, Value and Extra Credit (QSVE) items they offer to their 401(k) plan and individual retirement account (IRA) clients.

Who is Responsible for Determining Fee Reasonableness?

The short answer: it depends on the retirement vehicle.

For employer sponsored retirement plans – such as 401(k)s - it is the responsibility of the plan fiduciary likely with assistance from their service providers.

ERISA requires that Plan Sponsors, as fiduciaries, engage in a prudent process for selecting and monitoring services provided to their plan. This requires a comparison of fees and value as a means of determining fee reasonableness. This means that they must gather “relevant” information, analyze it and then make an informed and reasoned decision. For their assessment of service providers, the DOL and courts have said that Plan Sponsors should obtain market data and evaluate plan services utilizing the best available data.

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For IRA’s, fee reasonableness is the responsibility of the Broker Dealer and/or Advisor.

Advisors have long been obligated by FINRA Regulatory Notice 13-45, issued in December 2013, which holds firms to their responsibilities when recommending a rollover or transfer of assets from an IRA to a qualified plan and how IRA’s are marketed. To more clearly understand the roles of each associated party in determining reasonable fees, Fred Reish and Bruce Ashton of Drinker Biddle & Reath has prepared the following whitepaper.

However, in both cases, you can argue that 408(b)(2) disclosures, Reg BI, the proposed Fiduciary Rule and litigation have intensified the obligation.

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However, in both cases, you can argue that 408(b)(2)disclosures, Reg BI, the proposed Fiduciary Rule and litigation have intensified the obligation.

What Factors Make Up Reasonable Fees?

Quality + Service + Value + Extra Credit.

You get what you pay for.
When conducting a benchmarking evaluation, we put FEES on one side and QSVE on the other.
  • Q

    is the QUALITY of the provider,

  • S

    stands for the SERVICES it is delivering,

  • V

    for the VALUE it supplies, and then

  • E

    is for EXTRA CREDIT it may be providing

If an Advisor is charging more than the median fee for a certain plan size but is providing exceptional quality, service and value then the fees may be reasonable. In addition, if a plan serviced by an Advisor maintains high participation rates, healthy deferral rates and is structured to generate strong retirement outcomes, then their level of Quality, Service, Value and Extra Credit may very well support a higher fee being charged.

It also works the same way in the IRA world. There are variables outside a flat fee analysis that determine if an Advisor is acting in the best interest of their clients.

Solutions for Determining Fee Reasonableness

DC Benchmarking Services

Fiduciary Decisions provides the industry’s most comprehensive Defined Contribution Plan Benchmarking Suite of Services.

  • All of Fiduciary Devisions’ data is obtained directly from the source – the Recordkeepers, TPAs and Advisor/Consultants who service the plans. Our comprehensive, verified data is no older than 90 days when obtained and includes fees, Quality, Services, Value and Extra Credit
  • Fiduciary Decisions’ proven method focuses on building apples-to-apples benchmark groups of similar plans by service provider, using high-quality data and providing a balanced assessment of the relationship between value and fees.
  • Our reports are designed to be simple, transparent and practical. The reports provide concise information and actionable intelligence that support sensible decision making. The reports and the process used to review them can be part of a prudent ERISA required review of fee reasonableness.
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IRA Rollover Suite of Services

The IRA Rollover Best Interest Determination Service presents 16 different factors to consider, besides fees—things such as retirement planning issues, investment flexibility issues, how you want to take out your money in retirement, annuities versus loans versus bankruptcy issues. While the tool was initially developed to help comply with the DOL Fiduciary Rule, it has been updated to address Reg BI and it can also be used to follow FINRA Regulatory Notice 13-45 when recommending rollovers to an IRA.

For advisors already applying a prudent process, the tool can help document that their recommendations are in the best interest of their clients. The tool also offers full compliance reporting and workflow oversight.

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