Benchmarking: A Means to Meet Compliance Obligations
Building a technology platform to benchmark plan fees that is easy, cost effective, and sufficient to establish a documentation trail to support a prudent compliance process.
Justin Witz1 min read238 wordsERISA Section 408(b)(2) became effective on July 1, 2012. Under Section 408(b)(2), a covered service provider (CSP), for the first time, is obligated to disclose to plan fiduciaries certain information that historically was concealed.
In particular, a CSP is obligated to disclose its fiduciary status, all direct and indirect fees received, and services rendered. The purpose is to provide the responsible plan fiduciary with sufficient information to make informed decisions about the reasonableness of fees for services rendered and whether any conflicts exist.
Critical Components to Effective Benchmarking
- Independent Database: A database of similar plans that is independent and objective. Benchmarking your fees against other plans all serviced by the same CSP is conflicted.
- Identify Fees for Services: Over 70 services and nine different roles can be identified. Since all CSPs are not alike in terms of services delivered, you should not expect their fees to be similar.
- Identify All Types of Fees: This includes fees invoiced to the plan sponsor or plan assets, indirect fees paid by investment companies, and non-monetary compensation.
Benchmarkings Effect on Fees
The Labor Department and the courts look for a documented process that supports a fiduciary claim of prudence. Benchmarking is the most cost effective and efficient means to evaluate fee reasonableness assuming there is statistically significant data of similar plans for comparison.
Fiduciaries should expect to see their fees fall between a range of the 25th to 75th percentile based on CSP location, service menu, personnel credentials, and personnel experience.
