Governmental Plans: Are Your Plan Fees Reasonable?

October 15, 2012

Authored by: benefitsbclp

Have you recently received fee disclosures from your plan service providers?  Do you know the total compensation your service providers receive for their services?  Are you aware how these costs impact plan participants?  Are these fees reasonable?

All plan fiduciaries, including governmental plan fiduciaries, have the duty to make sure fees paid for services are reasonable. However, until now, there hasn’t been any formal regulatory disclosure requirement governing service provider compensation. In 2012, the Department of Labor (DOL) finalized fee disclosure rules applicable to ERISA plans.  Generally, these rules were issued to assist plan sponsors and fiduciaries in determining whether plan-related fees are reasonable for and to provide transparency for plan fiduciaries and participants.  Although these fee disclosure rules only apply to ERISA-governed private sector plans, governmental plans should consider following these new rules as a fiduciary best practice.

The DOL fee disclosure rules consists of two disclosure requirements: (1) the service provider fee disclosure, and (2) the participant-level fee disclosure.

Service Provider Fee Disclosure

Generally, the service provider fee disclosure requires “covered service providers” (such as recordkeepers, brokerage services, investment advisors, investment fund and managers, etc.) to provide sponsors of defined benefit plans and defined contribution plans a disclosure of their fees and services. In general, the service provider fee disclosure requires:

  • A description of services to be provided pursuant to the contract or arrangement;
  • Information on whether the services provided to the plan by the provider are done in a fiduciary capacity or as a investment advisor;
  • A description of all compensation received by the provider in connection with the services, including all direct compensation from the plan and all indirect compensation from sources other than the plan (e.g., commissions, soft dollar fees, 12b-1 fees, sub-transfer agency fees, revenue sharing);
  • Descriptions of annual operating expenses (e.g., expense ratio) of investment alternatives and other information in the control of the service provider that is considered investment-related information which must be provided automatically under the participant-level fee disclosure discussed below; and
  • A description of any compensation that the service provider expects to receive in connection with the termination of the contract or arrangement and how any prepaid amounts will be calculated and refunded upon such termination.

The plan sponsor fee disclosure regulation is designed to provide plan sponsors the information needed to determine the reasonableness of fees and compensation received by service providers to the plan.

Participant-Level Fee Disclosure

The participant-level fee disclosure rules only apply to individual account or defined contribution plans.  The disclosure is designed to inform participants of all fees they are paying under the plan. Most recordkeepers and third-party service providers are providing plan sponsors with the disclosures and information to comply with this rule. To comply, plan sponsors must provide participants with plan-related information such as:

  • General plan information, including investment instructions and restrictions;
  • An explanation of fees and expenses charged for general plan administrative services;
  • A description of fees and expenses that may be charged to or deducted from the participant’s account based on the actions taken by the participant; and
  • Revenue sharing arrangements must be disclosed to participants. However, specific revenue sharing amounts do not have to be broken out.

The following investment-related information must be disclosed to participants automatically with respect to each investment option offered under the plan:

  • Historical investment performance data;
  • Benchmark information, including the name and returns of an appropriate benchmark over 1-, 5- and 10-year periods;
  • Total annual operating expenses expressed both as a percentage of assets (expense ratio) and as a dollar amount per $1,000 invested; and
  • A website address to a website containing additional information regarding the investment alternatives.

Best Practices for Governmental Plans

Although the DOL fee disclosures rules do not apply to governmental plans, the rules establish a framework that governmental plan sponsors and fiduciaries should consider following as a best practice.  As a matter of best practices, governmental plan sponsors and fiduciaries should consider doing the following:

1.         Government plans should request the same information required by the DOL fee disclosures from their service providers.  If a governmental plan fiduciary receives pushback on providing this information, there may be a problem and the fiduciary may want to consider putting the services out to bid.

2.         Once the fee disclosure information is provided, plan fiduciaries should read, understand, and evaluate the information in order to determine that the fees identified in the disclosures are reasonable and that the services being provided and paid for are appropriate and necessary for the administration of the plan.  This does not mean that every plan should pay the lowest possible amount for services, but rather that the fiduciaries must determine that the fees being paid are reasonable with respect to the quality of necessary services being provided.  When determining reasonableness of fees, fiduciaries should consider such aspects as quality of services, costs, complexity of the plan, and needs of the participants.  This analysis may require the assistance of an investment advisor who should be able to benchmark the fees by comparing them to fees charged to plans by other providers for similar services or by conducting an actual or hypothetical request for proposal.

3.         Governmental plans should consider providing a participant-level fee disclosure to 401(a), non-ERISA 403(b), and 457(b) participants similar to the participant-level disclosures required for ERISA plans.  As with ERISA plans, service providers should be able assist with these disclosures.

4.         To the extent governmental plans and fiduciaries follow the DOL rules, those plans and fiduciaries should continue to follow the DOL fee disclosure guidance as a matter of best practices to help demonstrate that they are satisfying their fiduciary responsibilities to plan participants.


Disclaimer/IRS Circular 230 Notice