972.392.1143 |
972.934.1269 (Fax)
Articles

3 Steps to reducing plan sponsor liability: Step 3 – Understanding Fees and Liability

To reduce your liability, we’ve looked at plan structure (September 24) and plan maintenance (October 1). The final step is a hot topic: understanding the fees associated with your plan. Once you understand the fees, you can take steps to improve expense ratios and further reduce your liability.  

A common misconception is that self-directed benefit plans put the liability on the plan participant, making fees a non-issue. While there is protection from liability under ERISA Section 404(c), the protection varies based on employer action. Your providing concrete education about plan options and investments puts you in a better position than if you just provide employees with a prospectus and fund report.

A common misconception is that self-directed benefit plans put the liability on the plan participant, making fees a non-issue. While there is protection from liability under ERISA Section 404(c), the protection varies based on employer action. Your providing concrete education about plan options and investments puts you in a better position than if you just provide employees with a prospectus and fund report.

The attention focused on administrative fees is often about the ‘hidden’ fees associated with bundled plans. (For more information, see my post about the DoL ruling about clarifying fees.) Employers who use a bundled retirement plan provider, such as an insurance company, often get all services together: TPA, trustee and investment advisor. The appearance of the bundled service is that there is not an administrative fee, but the fees are actually hidden in the mutual funds. There are also fees in the contract language, especially ‘penalty’ fees for switching providers prior to the contract end. A bundled plan is often attractive, especially for new businesses and new retirement plans. However, it’s important to ask the provider about all fees and be prepared to answer the question to employees and the DoL. As a rule of thumb, when plan assets reach $1 million or more, it’s a good time to move to an unbundled provider to take advantage of economies of scale.

Reviewing your plan investments carefully by de-constructing the parts can reveal the presence of hidden fees. It’s not as complicated as it sounds, and can be a wise use of time and outside counsel to save you money and liability in the long run.

Please contact me if you have questions about reviewing your plan to reduce your liability.