Help keep your defined benefit plan fees under control
As a sponsor of a pension plan, you’re delivering a wonderful benefit to your employees. Of course, that comes with a cost. Defined benefit plan fees tend to fall into 3 buckets:
- Funding the plan according to current funding rules and regulations. Depending on the plan’s contribution strategy, this could be the biggest outlay for an organization. One of the ways it can be managed is with a liability-driven investing strategy.
- PBGC premiums. These insurance premiums to the Pension Benefit Guaranty Corporation continue to rise and can put a dent in an organization’s financial statement. One way to potentially help is with a pension risk transfer strategy.
- Defined benefit plan fees. Although defined benefit plan fees are relatively small compared to your plan’s benefit commitments, as a fiduciary it’s still important to make sure they’re reasonable. After all, ERISA requires plan fiduciaries to act in the best interest of plan participants and beneficiaries. And paying excessive fees is not acting in their best interest.
Understand your fees
The first step to controlling plan fees is understanding what you’re paying for. Generally, defined benefit plan fees cover:
Are your defined benefit plan fees reasonable?
Part of your fiduciary responsibility is making sure plan fees are “reasonable.” In other words, fees should be on par with the services and value the plan and participants receive. Typically, the more services provided—and the greater the responsibilities and complexities of those services—the greater the value and the higher the cost.
To evaluate plan fees, consider:
- Quantity of services provided
- Responsibilities delegated to or managed by the service provider(s)
- Complexity of the services
Match fees with your needs and expectations
The fees should line up with your needs. For instance, do you expect the service provider(s) to do more for you and the plan? Or will your staff do much of the work?
Your service provider(s) can and should help reduce the administrative burdens of the plan, including:
- Taking care of plan administrative functions and recordkeeping
- Providing resources and tools—such as a participant website, marketing and communication materials, portal for data management and transactions, call center and other education services
- Handling investment fiduciary responsibilities*
- Providing a due diligence process for choosing and monitoring plan investment advisors
- Helping with government reporting, plan compliance or audit services
Special services often cost extra
There also are some added-value services to factor into your research. Instead of offering a cookie-cutter approach, for example, the service provider(s) may provide unique services needed to help meet your plan’s needs.
They may also offer to consult on technical aspects of the plan. This could include IRS or DOL regulations, benefit design and modeling, mergers and acquisitions and more.
Another consideration is whether the service provider offers flexible options for paying plan fees. These options should be explained to you. Options could include:
- Plan sponsor pays fees
- Fees paid from revenue sharing of one or more investment options
- Any combination of the above
Another clue about fees is how transparent your provider(s) is about them. Details of the fee structure should be clear enough to compare your current provider’s fee structure with that of other service providers. If they’re not — ask.
Finally, look at the big picture
Once you have a good handle on the specific services, fees and capabilities of your service provider(s), work with your advisor to evaluate if the fees are reasonable for the services and value received:
- Remember the objectives of your plan.
- Review services received and the quality.
- Consider the reputation of the service provider(s).
- Review benefits of services to plan participants.
We can help
Evaluating plan fees can be complicated. But you don’t have to go it alone. Our plan fees checklist (PDF) can help. It walks you through the process of evaluating DB plan service providers.
For more guidance, give us a call at 800-952-3343 ext. 22681, or contact your advisor.
*The decision to delegate and ongoing monitoring of the provider is ultimately a responsibility that belongs to the appropriate retirement plan fiduciaries.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
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