In Practice February 22, 2007
Focus on Plan Fees and Revenue Sharing to Continue
Retirement plan advisers can anticipate a continued focus on fee transparency in the coming months.
Reported by Alison Cooke
As a result of the series of lawsuits filed against plan sponsors and plan providers, there will be calls for increased fee transparency within the next year, and new action from the government and the Department of Labor (DoL), said Fred Reish, of Reish, Luftman, Reicher, & Cohen, speaking on PLANSPONSOR’s “Plugged In” webcast yesterday.
Since these suits are likely only to continue to put pressure on the retirement plan industry, especially as the government gets involved, Reish’s advice for plan advisers is to be working on fee transparency with clients. “Position yourself as an ally to the plan sponsor,” he said. An adviser’s job is to tell the plan sponsor if the fees are right for the plan, according to Mark Davis, an RIA and partner at Kravitz Davis Sansone, who said that fee fairness should be an ongoing discussion.
The Allegations
The lawsuits, filed by the St. Louis-based law firm of Schlichter, Bogard & Denton against several 401(k) plans sponsored by large employers, are not identical, said Nevin Adams, Editor-in-Chief of PLANADVISER (See Fee for All), in fact, it was surprising to see how specific they were about each program. Although not the same, in general the allegations include three major concerns: first, that plans entered service arrangements under which the plan and participants paid “unreasonable fees” and “hidden and excessive fees;” second, that the plan sponsor did not understand or recognize revenue sharing arrangements; lastly, that the plan sponsor did not disclose to participants in “proper detail and clarity” the transactions fees and expenses.
Under the Employee Retirement Income Security Act of 1974 (ERISA) 406(a), fiduciaries must act in the exclusive interest of participants and beneficiaries for the purpose of providing benefits and defraying reasonable administrative expenses of the plan and 406(b) says that a fiduciary cannot use influence or authority to be paid fees from third party provider. ERISA 408(b)(2) states that the use of plan assets to pay fees of plan service providers is a prohibited transaction unless the services are necessary and the compensation is reasonable. The lawsuits allege breaches under all of these.
“Even though I disagree with some of their conclusions,” Reish said, of the customized complaints, “they did do their homework.”
“Hidden” Meanings
Reish said it is interesting to examine the use of the word “hidden” in the complaints. He said those filing the complaint are effectively saying that when the payments are indirect, when the plan isn’t cutting a check to a provider but instead are making payments to each other, that is a hidden fee. Their “logic is that if something is hidden it is bad,” Reish said, “[they think a provider] wouldn’t hide a good thing.’
Reish said that there are different perspectives on the issue; those that say the only thing that matters is the overall cost, and its fairness, and people who say that the components of the total cost must be disclosed, because they are entitled to know what each entity is making as part of a determination that the allocation, as well as the total amount, is fair – and if anyone making recommendations to the plan, be they a fiduciary or not, is making money
When you buy a car, you don’t consider what the metal or other components costs, you just examine the total cost, said Adams, discussing the specificity of the complaints, looking for full disclosure on how plan fees are charged. However, commented Reish, when you buy a car, you don’t want to learn that your brother-in-law is getting paid to get you to buy that vehicle, alluding to the revenue sharing agreements critiqued in the suits.
Coming Monday: Part II – Appropriate share classes, looming regulatory changes, and insights on how and how often to review plan fees.