FAQ: Fee Reasonableness¹

Multnomah Group, Inc.

What standard applies when determining whether retirement plan fees are appropriate?

Under the Employee Retirement Income Security Act of 1974 (ERISA), retirement plan fiduciaries must ensure that fees paid from the plan are reasonable in light of the services being rendered. Attaining fee reasonableness does not require choosing the service provider with the lowest fee service proposal.

How can a plan fiduciary prove the reasonableness of plan fees?

While the recipe for meeting the reasonableness standard is not expressly finite, demonstrating certain highly encouraged best practices has been known to satisfy Department of Labor inquiries on the topic.

  • Plan sponsors should dissect and thoroughly understand the fees paid from plan assets.
  • A fee policy statement exhaustively listing plan fees and describing how they are paid is highly useful.
  • Plan sponsors should be able to confidently assert that they have thoroughly reviewed annual fee disclosures from vendors receiving a certain level or type of compensation paid from plan assets
  • Conducting an annual recordkeeping fee benchmarking study allows for meaningful comparison of current plan fees to a range of fees that would be expected if the plan’s recordkeeping services contract went out to bid in the marketplace. Apparent opportunities to negotiate fees downward should be taken.
  • A recordkeeping vendor request for proposal process every 5 years or so can also help satisfy the reasonableness standard, as well as a related fiduciary duty to monitor all plan services providers.

Should a plan sponsor always offer the lowest cost available share class mutual funds?

Mutual funds are often offered in a hierarchy of share classes assigned according to factors such as amount of assets invested in the fund. Sometimes, investing higher dollar amounts in a fund allows for lower cost share class qualification. Plan fiduciaries must consider elements such as overall plan cost and available revenue sharing before determining the appropriate share class. What is most important for plan fiduciaries here and with regard to fee reasonableness determinations generally is the ability to demonstrate a prudent (i.e. disciplined and diligent) process under which the issue was evaluated.

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Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.