Retirement plan sponsors now have more information than ever before about the fees they are paying for plan services. This helps meet fiduciary obligations to monitor and assess the “reasonableness” of plan fees, but it also can lead to uncertainty about how best to meet these obligations.
The large amounts of information provided by the U.S. Department of Labor’s 408(b)(2) fee disclosure regulations, in place since mid-2012, can be hard to use and scrutinize. Should the plan seek the lowest costs for plan services? Or could that approach overlook the quality and effectiveness of the services being provided?
To help answer those questions, academic, research, medical and cultural retirement services provider TIAA-CREF recommends a four-step framework using the key parameters of: Who, What, How and Why developed by fiduciary expert Donald Trone, chief executive officer of 3ethos, an investment management and leadership training firm. This four-step process can help plan sponsors make reasonably informed and knowledgeable assessments about fees:
- Who is receiving compensation from your plan?
- What are the fees and expenses associated with your plan?
- How do your fees and expenses compare with other service providers or investment options?
- Why is the compensation warranted?
In its December 2014 report, “Deciding What is Reasonable: Assessing Fees Using Value and Outcomes,” TIAA-CREF says the first step is to identify a list of all covered service providers, which may include plan fiduciaries, investment managers, recordkeepers, brokers and providers receiving “indirect compensation” such as investment or plan consultants. Then, the plan sponsor should gather complete information regarding all providers, services and fees.
Determine What Fees Are Being Paid
Next, the plan sponsor should determine what fees and expenses are being paid to these providers. Despite the variations in ways the providers may be compensated, it may be helpful to review your fees in terms of three basic categories, TIAA-CREF says in the report. They are:
- administrative services;
- individual services; and
- investment services.
This approach can help you better understand exactly what services are included in your agreement and various related expenses. It also can inform discussions with providers and prompt questions about what factors and processes are driving your plan costs, TIAA-CREF says.
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