At a recent conference I attended, one of the speakers mentioned that the final ERISA 408(b)(2) regulation used the word “reasonable” or “reasonableness” 49 times (yes, they actually counted). It’s obvious the Department of Labor (DOL) means business. The DOL expects responsible plan fiduciaries to fulfill their obligation to act solely in the best interest of plan participants and their beneficiaries; this includes paying reasonable plan expenses for services deemed necessary to the plan. By mandating disclosure of fees by covered service providers, the DOL has removed some of the many barriers to understanding and analyzing plan fees.
Unfortunately, the DOL has not provided a clear definition of fee “reasonableness.” To help make a fiduciary determination of reasonableness, plan sponsors should consider benchmarking the plan’s fees with a group of similar retirement plans, or using a formal request for proposal (RFP) bidding process. This determination should be documented, in writing, and the process of examining fees should be repeated annually, at a minimum. If the plan sponsor fails to make this determination, the DOL may consider the arrangement with the covered service provider to be a prohibited transaction. The penalties associated with a prohibited transaction are steep.
One last consideration for plan sponsors is that they act on their analysis immediately. Under ERISA 404(a)(5), by August 30, 2012, plan sponsors must provide initial annual disclosure of plan and investment-level information to plan participants. Prudent plan sponsors should be able to justify plan fees and expenses before participant disclosures are issued.