Retirement plan sponsors are the first, and most important, line of defense in providing employees with well-managed retirement savings plans.
Retirement Planning
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3 min read
Retirement plan sponsors are the first, and most important, line of defense in providing employees with well-managed retirement savings plans. However, they face significant challenges in the form of excessive and complex fee structures within the retirement plan marketplace. As the industry continues to evolve, it is vital for sponsors to take proactive measures in managing their fees to safeguard their participants' retirement savings and effectively fulfill their fiduciary responsibilities.
The Ultimate Cost of Excessive Fees
Fees in retirement plans come in various forms, including administrative, investment management, and advisory fees, among others. While various types of fees are necessary for maintaining the quality and performance of a plan, excessive fees can significantly diminish the retirement savings of participants over time. According to a 2023 study by the Center for American Progress, even a seemingly small difference in fees, such as 0.25% versus 1.00%, can lead to tens of thousands of dollars less in a participant’s retirement account by the time they retire.
These excessive fees often remain hidden from participants, buried in complex fee structures and difficult-to-decipher fund disclosures. While transparency has improved over the years, thanks in part to regulatory initiatives like the Department of Labor’s fee disclosure rules, many plan sponsors still struggle to fully understand and effectively manage these costs.
The Evolution of the Industry
The retirement plan industry continues to go through significant changes. The proliferation of low-cost providers, combined with the increasing popularity of automated investment management services, has intensified competition and put pressure on providers to carefully illustrate the value provided for their fees. This often includes comparisons of varied approaches, including sometimes layered, multi-provider frameworks.
In recent times, there has been a substantial surge in litigation and regulatory scrutiny pertaining to excessive fees in retirement plans. This places sponsors at elevated risk if they do not prioritize the best interests of plan participants or do not have documentation that they have evaluated and thoroughly understand their plan fees. Sponsors are held accountable for overseeing service providers and guaranteeing the reasonableness of fees, and this accountability appears to be increasing.
Taking a Proactive Approach
With so many changes happening, plan sponsors must take an active role in managing retirement plan fees. Here are a few steps they should consider:
- Regular Fee Benchmarking
Sponsors should conduct regular fee benchmarking exercises to assess the reasonableness of fees charged by service providers. This includes comparing current fees against industry benchmarks, completing questionnaires on excessive fees, and exploring alternative providers or services offering similar or better quality at a lower cost.
- Increase Fee Transparency
Clear communication of fees to participants is essential. Sponsors must provide easily understandable fee disclosures and educational resources to empower participants to make well-informed decisions.
- Stay Informed About Regulatory Changes
The regulations governing retirement plans are constantly changing. Sponsors need to stay informed about new regulations and guidelines that could impact fee structures and their fiduciary duties.
Transparent Simplicity
As the retirement plan industry evolves, the importance of managing fees cannot be overstated. Plan sponsors must take a proactive approach to protect their participants. As one prominent ERISA attorney was quoted, “If you haven’t gotten one of these questionnaires yet, get ready.” By regularly benchmarking fees, increasing transparency, and staying informed, sponsors can navigate the complexities of retirement plan fees and ensure a more secure financial future for their participants.
Disclaimer:
This blog does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only.
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