Fee Benchmarking

Scire est mensurare

A retirement plan fiduciary must act to defray “reasonable expenses of administering the plan”. In addition they may contract a party in interest for services “if no more than reasonable compensation is paid therefor”. (Title 29 §1104(a)(1)(A)(ii))

These duties have been law since the enactment of ERISA in 1974. Due to both the lack of clarity on the definition of “reasonable” and the difficulty in obtaining appropriate information, most plan fiduciaries have swept this responsibility under the rug. The good news is that beginning April 1, 2011, all parties receiving compensation from retirement plan assets must report that compensation to the applicable plan fiduciary.

The bad news…the plan fiduciary must act on that information or suffer dire consequences.

Hence the latin phrase: Scire est mensurare or in English “To know is to measure”

In order to determine what is reasonable, there must be a reference point from which to compare. Some suggest that a formal Request for Proposal (RFP) be initiated. Although this can be useful for comparison purposes, it also has some drawbacks:

  • The process is time consuming and expensive
  • If an existing adviser leads the process, the results may be skewed
  • The word gets out causing an inundation of solicitations

A better solution may be plan benchmarking of current fees and services against plans of similar size and demographics. If benchmarking is determined to be the best solution, make sure the report is prepared with the following:

  • A separation where possible of all components of plan administration including, recordkeeping, custody, compliance, revenue sharing, adviser compensation, broker/dealer overrides , trading costs and proprietary product profit margins.
  • A knowledgeable retirement plan specialist involved in the data collection and input process to uncover hidden costs
  • A conflict of interest free process by insisting that the collector of information is prohibited from soliciting business that is being benchmarked.

Asset Strategy Consultants provides a complete benchmarking report that can include the following measures:

  • Plan Fees
  • Investment Expenses
  • Adviser Expenses
  • Plan Design features
  • Participant retirement success measurements