The advisor’s number-one
focus should be on serving the plan, even though it may require tough
discussions with individuals the advisor may have recommended.
One of the perennial issues facing the sponsors, participants and fiduciaries
of 403(b) plans, as well as the consultants servicing or advising such
individuals or plans, is plan expenses. Section 403(b) plans, particularly
those that are covered ERISA, must carefully watch what they spend with their
ERISA specifically mandates that a plan may not use plan assets to pay expenses
unless such expenses are “reasonable.” Of course, that leads to the question:
What is “reasonable?” If a plan pays more than “reasonable expenses” the plan’s
fiduciaries have breached their duties to the plan.
The Department of Labor (DOL), which is charged with enforcing ERISA, has
repeatedly sidestepped providing any type of direct quantitative answer.
Historically, the DOL’s response has been that “reasonable” is determined by
the actual services being provided and the surrounding facts and circumstances.
When 403(b) plan fiduciaries review plan expenses, the advisors may find
themselves in a difficult ethical situation because they’re normally among the
service providers paid by the plan and may have recommended the other service
providers engaged by the plan.
Types of Expenses
Generally, 403(b) plan expenses can be divided into two very simplistic and
broad categories – administrative expenses and investment expenses.
The administrative expense category would encompass such expenses as fees
imposed by the plan for loans and distributions. The plan sponsor typically
doesn’t create these fees, they’re usually part of a schedule charged by the
third-party administrator or recordkeeper.
The plan sponsor, in most instances, just accepts those charges and passes them
along to participants. The DOL has acknowledged that plans may charge such fees
— once again as long as they’re reasonable.
In addition to expenses imposed on particular participants for using services
or options available under the plan, plans have “global” expenses imposed on
all participants. These expenses could include such things as preparation of
plan documents, Form 5500 annual reports, and the audit of larger plans
required for the Form 5500. Until recently, these expenses were minimal or
nonexistent for 403(b) plans. Although ERISA-covered 403(b) plans had been
required to have documentation for years, many plans were run with minimal or
no documentation. In addition, the Form 5500s required for 403(b) plans were
very simple and didn’t require audits even for plans covering 100 or more
participants. That changed in 2009 and 403(b) plans require compliance with
reporting and disclosure comparable to that required of other retirement plans.
For plans with 100 or more participants, an audit is required. The audit and
more elaborate Form 5500 reporting have added expenses for not-for-profit plan
sponsors at a time when such organizations are suffering revenue and donation
declines. The costs for audit services can and are often passed along to
the plan itself. Once again, the DOL has indicated it is permissible to do so
as long as the expenses are “reasonable.”
Under the Internal Revenue Code, 403(b) plans can be invested in only two types
of investments – annuity contracts and/or mutual funds. Both of these
investment types are subject to internal fees and expenses. Furthermore, some
advisors may add additional fees, such as “wrap” fees or investment advisory
fees. Once again, ERISA permits a plan to pay such fees so long as they’re
“reasonable” based on the services provided.
One of the problems plan sponsors and fiduciaries have had is understanding
what fees were being charged and the exact amount of those fees. The DOL has
been working for years to develop a reporting requirement that mandates
disclosure of such fees. Various interim and final regulations have been issued
and service providers will need to more fully disclose fees to plan
fiduciaries. Plans, including 403(b) plans, will need to disclose such fees to
participants on a quarterly basis. Thus, the providers and advisors will need
to provide this information. A concern in the industry is that once plan
sponsors and participants view the fees, they may question the charges.
Action Steps for Advisors
In the climate of scrutinizing expenses, advisors have an excellent opportunity
to provide a useful service to their fiduciary and plan sponsor clients, but in
doing so the advisor may be injuring referral relationships and may need to
explain and justify his or her own compensation.
First, most fiduciaries and plan sponsors don’t understand the nature of the
administrative fees imposed by the TPAs. To the extent that it’s possible to
provide the fiduciary or plan sponsor with data documenting what typical fees
are would be a tremendous help. If the “typical” fee for a loan is $100, why
should a plan charge $125? To the extent such fees are negotiable, it may be
possible to assist the client in achieving a list of fees more in line with the
market fees. Potential issues for an advisor may arise if the TPA is someone
the advisor recommended. While maintaining good referral relationships is
important, the advisor’s first priority is to the plan’s fiduciaries.
Second, although the fees for Form 5500s and audits may be outside the
expertise of most advisors, simply serving as a sounding board for the
fiduciaries or plan sponsors to discuss the need for these services and to at
least test the market from time to time can be of great help.
Third, investment fees are, of course, integral to how advisors are
compensated. These fees can be complex and hard for a plan sponsor or fiduciary
to understand. An advisor can provide an invaluable service by making these
fees comprehensible. Although there may be a tendency for plan sponsors or
fiduciaries to gravitate toward products with lower fees and internal
costs,that may not always be the correct response.
The reasonableness of fees is measured by what the plan is receiving for those
fees. If a provider has higher fees, but in turn generates revenue sharing with
TPAs who in turn lower their fees, the fees and expenses may be very reasonable
when all is considered. An advisor can help explain this situation to assist
plan sponsors and fiduciaries in reviewing those costs and services.
Likewise, the fees and expenses paid directly or indirectly to the advisors
should also be scrutinized:
What services is the advisor providing?
- Is the advisor
providing fiduciary reports to the plan fiduciaries?
- Is he or she
attending in-person or telephonic meetings with the fiduciaries?
- Are the meetings
quarterly or at least annual?
Does the advisor routinely attend enrollment meetings for plan participants to
help explain the investment options available? (Advisors providing general
information aren’t required to move into the realm of direct investment
Keep in mind that an advisor who sets up a 403(b) plan and has never had
conversations with the plan sponsor or the fiduciaries after the signatures
were on the paperwork may have a difficult time helping those fiduciaries
justify fees and expenses paid to the advisor as “reasonable.”
An advisor can have an ethical dilemma when trying to assist 403(b) plan
fiduciaries to understand how to properly pay only “reasonable” plan expenses
with plan assets. The advisor’s number one focus should be on serving the plan,
even though it may require tough discussions with individuals the advisor may
have recommended and perhaps explaining and justifying how and how much the
advisor is paid.
here for the original article from NTSA.