Retirement Plan Sponsor Fiduciary Role – What is the Best Fee Benchmarking Method?

Plan sponsors are wondering what to do with the influx of data generated by our new age of regulated fee disclosure. What are the fiduciary responsibilities surrounding this data? As an accountant, I feel it is similar to reviewing a balance sheet or income statement. This new fee disclosure data is valuable, but what do you do with it? In the past we have looked at historical data to see trends in revenue and expenses. You would then most likely access data that has been accumulated from companies similar to yours and make comparisons. Although this type of historic information has been available to companies for many years, the data has not included retirement plan fees. The question now is what Plan Sponsors should do with the recent wealth of fee disclosure information.

The Department of Labor has entrusted the Plan Sponsor or Trustee with the review of the expenses of the Plan. This is not a new stance; fiduciaries have always held this responsibility, however over the last couple of years this responsibility has been thrust into the spotlight. In response to the need to evaluate plan expenses, there have been a few new companies that now provide benchmarking of plan expenses and returns. Now the issue is to research the questions which arise alongside the growth of these new companies. From where do they extract their information? What level of service does each plan receive? How large of a cross-section of the industry are they using? How do we ensure this data is reasonably interpreted?

In any new industry there are many questions which grow in tandem with its development. This situation is reminiscent of the introduction of target date mutual funds. This investment portfolio concept was developed a number of years ago to fill the participant investment knowledge gap. So what is happening with target date funds today? The rules are being reviewed because each set of target date funds has a different set of assumptions. There are no standardized formulas for the glide paths associated with multiple fund families. This has led to varying rates of return and levels of risk between the same target dates. We can see the same issues developing for fee benchmarking; there are too many differing assumptions and databases.

The current method used in benchmarking retirement plans is questionable. It is important to recognize the inherent issues surrounding any new industry and avoid complete reliance on benchmark testing. Benchmarking alone cannot quantify the level of service a plan receives. In addition, there is not enough history in this new industry on which fiduciaries may rely comfortably. Proposed regulations are expected in the near future; however, in the short-term, the best advice may be to use common sense judgment using a variety of documented information from your plan advisors and consultants.