Help keep your defined benefit plan fees under control
Offering a pension plan to your employees is a major benefit, especially in today’s environment. And of course, it comes with a cost. But if you’re looking for ways to reduce expenses, there are steps you can take to help keep your plan’s fees reasonable.
Defined benefit (DB) plan fees tend to fall into three categories:
- Funding the plan according to current rules and regulations. Depending on your plan’s contribution strategy, this could be your biggest expense. One of the ways your cost can be managed is with a liability-driven investing strategy.
- PBGC premiums. These insurance premiums to the Pension Benefit Guaranty Corporation (PBGC) continue to rise and can put a dent in your financial statement. One way to potentially reduce costs is with a pension risk transfer strategy.
- DB plan fees. Although relatively small compared to your plan’s benefit commitments, as a fiduciary, it’s still important to make sure fees are reasonable. After all, ERISA requires fiduciaries to act in the best interest of plan participants and beneficiaries. (Paying excessive fees isn’t acting in their best interest.)
Once you’ve categorized your plan, follow these steps to help get a handle on costs.
1. Understand your total fees.
The first step to controlling plan fees is to understand what you’re paying for. Generally, DB plan fees cover three types of services.
- Benefit calculations
Administration and operations
- Processing benefits
- Claims processing
- Managing data
- Participant services
- Plan audits
Custodial, trust, and investment services
- Investment advice
- Allocation strategy
- Managing investments
2. Determine if your DB plan fees are reasonable.
Part of your fiduciary responsibility is to make sure plan fees are “reasonable,” meaning they’re 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.
What to consider when evaluating fees
- Quantity of services provided
- Responsibilities delegated to or managed by the service provider(s)
- Complexity of the services
3. Match fees with your needs and expectations.
Do you expect your service provider(s) to do more for your DB plan, or will your staff do much of the work? The fees should line up with your needs. Your service provider(s) can and should help reduce the administrative costs of the plan. Options could include:
- Taking care of plan administrative functions and recordkeeping
- Providing resources and tools—such as a participant website, marketing and communication materials, a portal for data management and transactions, a call center, plus other education services
- Handling investment fiduciary responsibilities*
- Providing a due diligence process for choosing and monitoring the plan’s investment advisors
- Helping with government reporting, plan compliance, or audit services
4. Consider the special services you need—and the ones you don’t.
There are added-value services to factor into your research that often cost extra. Instead of offering a cookie-cutter approach, for example, a provider may offer unique services to your DB plan. Do you need those services?
They may also offer to consult on technical aspects of your pension plan, such as Internal Revenue Service (IRS) or Department of Labor (DOL) regulations, benefit design and modeling, mergers and acquisitions, and more.
Another consideration is whether service providers offer flexible options for paying fees. If you didn’t get it already, ask for an explanation of the options. They're generally handled one of three ways:
- The plan sponsor pays the fees
- Revenue sharing through one or more investment options
- Any combination of the above
How transparent are your providers about their fee structure? Details should be clear enough to compare to another service provider’s fees. If not, ask them to clarify.
5. Look at the big picture.
Once you have a good handle on the specific services, fees, and capabilities of your service providers, work with your financial professional to evaluate if the fees are reasonable using these measures:
- Keep the objectives of your plan in mind.
- Review the services you receive and the quality.
- Consider the reputation of the service provider(s).
- Review the benefits of services for plan participants.
How we can help
Evaluating plan fees can be complicated, but you don’t have to go it alone. Our plan fees checklist (PDF) walks you through the process of evaluating DB plan service providers. For more assistance, give us a call at 800-952-3343, ext. 22681.
*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.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392.
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