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What kind of documentation will the DOL accept in determining fee reasonableness in retirement plans?

Most ERISA attorneys have cited comparative benchmarking as the only real way to know if you the fees that you are paying are reasonableness during various forums such as PANC and ASPPA.

Oct 11, 2013 by Michael M. from Alpharetta, GA in  |  Flag
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Herbert N Glass Level 18

Hi Michael,

I am happy to answer your question, and my answer is based on a seminar that was sponsored locally (Detroit, Michigan area) by ASPPA, just three weeks ago as well as my many years of experience. The speaker ("she") was from the DOL's regional office and I had the pleasure to chat with her after the seminar to discuss some additional questions that I wanted more detailed answers to. In addition, during my 40 years of being in the Pension Consulting and Administration (TPA) business, 36 of which I also owned and managed all operations of the business, I have represented my clients through hundreds of IRS plan audits and significantly fewer DOL Investigations (an "investigation" is what the DOL calls it when they perform their duty to review a Qualified Retirement matter).

I might add that there are far fewer DOL Investigations, than IRS audits because of a few reasons. First, there are far fewer DOL "Investigators" than there are IRS "Agents" and when I asked the DOL speaker if the DOL was hiring more people to help investigate Fiduciaries of Retirement Plans, she said, "not only is the DOL reducing their staff (and this was prior to our Government shutdown), but they are transferring staff out of the department that does plan investigations to do other higher priority work.

I was told years ago by DOL Investigators and their superior in Detroit, and now again confirmed by the DOL speaker that the DOL policy has not changed. The DOL does not just start an investigation of a Qualified Plan matter randomly, that is, there has to be a very good reason for them to take the time to start an investigation of most anything that might involve a Retirement Plan. One of the reasons mentioned is if the DOL happens to be investigating a company for something else, and they feel they have a good case against the company, they will consciously look at other possible DOL Regulations that the employer may have violated as well. This would generally be because if they are going to prosecute or negotiate a settlement with the employer, they want as much as they can find to strengthen their position. Another reason, I been told, is that the Regional DOL budget will get charged for the cost of prosecution if they lose in court - also if they lose and have to pay the costs that the defendant incurred defending themselves, that amount will be charged to their regional budget as well. Therefore, they do not usually get involved deeply with any situation unless they have a strong feeling that they can win if the case goes to court.

There is another reason that may cause the DOL to investigate an employer. If an employee calls or writes the DOL asking for their help because the employee thinks their employer has not acted correctly or legally towards their employees, and that the employees have been harmed as a result, the DOL will consider looking into the matter, but not always. The DOL will only take action in a pension matter if they are convinced that the employer is doing something wrong that is causing financial harm to the employees. In such cases, the DOL could do something as simple as calling the employer and just verbally warning the employer to stop the suspected practice and/or fix a past error by making the employees that were affected financially "whole." Although, it has been my experience that if the employer has to do something that involves a higher amount of money per employee, they will be more apt to get more involved with the investigation, even though prosecution may not be their ultimate goal, but rather their goal would be to get the employer to comply with the applicable laws and/or regulations that may have been violated and that such violation(s) are the cause of some or all of the employees to be financially harmed.

So, with respect to your specific question, I want to say that regardless of the chances that the DOL is going to investigate a company or not, plan fiduciaries should always remember that the DOL is not necessarily the only ones to be concerned about. That is, some of the largest lawsuits against Fiduciaries of plans has been those started by employees and not the DOL. Such lawsuits are often class actions. In fact, I was interviewed recently to represent, as an expert witness, a group of 46,000 employees whose attorneys had already filed a complaint with the courts. So, it pays to understand the rules, etc. and act accordingly, and that means that a Fiduciary must act in the best interest of the plan participants. If that is done properly, one need not to fear lawsuits or the DOL.

Now, to answer the question, "what kind of documentation would the DOL want to see that would help them come to the conclusion that the fees being paid by a plan (not the fees paid by a company) are reasonable?" The answer is not that one can just "show them a benchmarking study and that is all that is necessary." But rather, the DOL can be satisfied even if there isn't a benchmarking study, as long as there is documentation that that might include showing them several separate proposals from other plan service providers that describes the services that will be performed and the fee that is quoted for such services. But, in addition, benchmarking studies and/or proposals from other plan service providers is absolutely not enough to satisfy the DOL or anybody else, if one cannot prove that all that paperwork and information was actually looked at and reviewed thoroughly and carefully before making a final decision as to which service company to choose.

What else should be done to adequately prove that Fiduciaries have taken the correct steps to adequately fulfill their responsibilities? For starters, one should keep in mind that the amount of review, etc. that one needs to do, is directly related to how many participants are in a plan and what the average value of a participant's account is.

The type of additional things Fiduciaries should do are as follows:

  1. Set up a file that is labeled with the "Plan Name" and the words "Fiduciary Due Diligence".

  2. As one reads any proposals or other information, they should make sure to make some notes in the margins, underline and/or highlight some of the important information as one reads, and make sure to go through the pages, as you read, allowing your page turning technique to leave the impression that the pages (at least the important ones) have been looked at. Then, when done, whatever has been read should be filed in the "Fiduciary Due Diligence" file.

  3. Also as one reads information, meets with someone, meets with a group or committee, regarding activities related to the actions that are necessary to carry out the duties of a Fiduciary, handwritten notes or minutes should be written down on a separate piece of paper that one may want to refer to later during or after the decision making process. Such notes should be dated and put into the "Fiduciary Due Diligence" file.

  4. Any decisions that are made as a Fiduciary should be documented in writing or by typed and also placed in the... that's right, the "Due Diligence" file.

  5. If one wants more documentation, one should make sure that any Fiduciary activity is written in their calendar, or a separate calendar, or just written on a piece of paper indicating the date, time, and activity performed. If such documentation is done elsewhere than in your regular daily calendar, then such paperwork, etc. should also be filed in the "Due Diligence" file.

There is one last thought I want to share with you about what the DOL has told me in addition to my seeing the same thing appearing in written articles and other items prepared by the DOL. That is that, it is absolutely not, I repeat, not necessary to pick or use the service provider that is the least expensive. Everyone knows the validity of the saying "You get what you pay for," and so does the DOL. So, it would be perfectly okay for the Fiduciary to choose the most expensive service provider, if such decision can be reasonably justified by the level of service and/or the level of expertise and competence that the Fiduciary believes the service provider can and will provide.

I hope that the above information and suggestions answer your question adequately. If I can be of further help, you can contact me through BrightScope.


Herbert N. Glass, Certified Pension Consultant MBA, CFP, CFG, ChFc, CLU, IAR

Glass Retirement Strategies, Inc. Bingham Farms, Michigan

Comment   |  Flag   |  Oct 11, 2013 from Franklin, MI

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Peter C. Karp Level 20


Plan fiduciaries have a specific obligation to consider the fees and expenses paid by your plan for its operations. ERISA’s fiduciary standards, discussed above, mean that fiduciaries must establish a prudent process for selecting investment alternatives and service providers to the plan; ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided; select investment alternatives that are prudent and adequately diversified; and monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices.

If participants direct the investments in their account, the plan provides information about their rights and responsibilities under the plan related to directing their investments. This includes plan and investment related information, including information about fees and expenses, that is needed to make informed decisions about the management of their account. The investment related information is provided in a format, such as a chart, that allows for a comparison among the plan’s investment options. The plan should provide this information before participants can direct investments for the first time and annually thereafter with information on the fees and expenses actually paid provided at least quarterly. Under the new DOL regulations, services providers are required to provide plan sponsors with an investment comparative chart that breaks down all of the fees and expenses of the investments. It is important that you document your process and periodically obtain requests for proposals for your plan so you can compare the fees and expenses. An experienced retirement plan advisor can be of great value in helping you determine and document the findings for your due diligence files.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Nov 01, 2013 from San Francisco, CA

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Michael, my understanding from ERISA attorneys is that if you have the honor of being audited, you need to document that you have made comparisons from different providers. The cheapest plan is not the only criteria for fee reasonableness; additional services offered, such as bilingual support, education materials and support, technology, etc can justify paying higher fees. So long as can document having made comparisons, and made a responsible decision, you should be OK. You should have a Due Diligence file where you keep all documentation of this nature.

If you are concerned your fees are too high, you should be making comparisons. If you think you have done your due diligence, but are still unsure, I would consult an ERISA attorney

Comment   |  Flag   |  Oct 15, 2013 from Delray Beach, FL

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Couldn't have said it better myself... no, really, I couldn't... great answer, and kudo's to you...

Comment   |  Flag   |  Oct 14, 2013 from Springfield, MO

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