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Retirement Plan Services
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5 min read
Learn how to understand, benchmark, and document reasonable fees to protect your participants and your plan
Fees shape participant outcomes and litigation risk, so sponsors need a clear playbook for understanding how fees are calculated and applied, how to benchmark them, and how to document reasonableness.
SWBC industry experts distill the process into practical steps that help you evaluate value, reduce conflicts, and strengthen fiduciary documentation.
Why Fees Matter and What Lawsuits Reveal
Sara Matlock, Senior Vice President, SWBC Retirement Plan Services, reminds sponsors that you do not go into a game without knowing the game plan, and that as a plan sponsor you need to understand the rules to deliver a winning retirement plan.
To frame the stakes, Matlock points to the Estee Lauder case involving alleged breaches tied to recordkeeping and administrative costs. Although the payout was around $975,000, the more painful part was that the matter stretched from 2014 to 2024. This illustrates that litigation can be long and costly; settlements typically don’t include the legal fees both incur when payout dollar figures look modest.
Common Pitfalls: Overconfidence and Fee Mechanics
We caution that overconfidence is a common trap. Simply because 408(b)(2) mandated fee disclosures, no one should assume a plan is free or that fees are fully understood. The issue is less about knowing the headline number and more about understanding how fees are calculated and collected across the plan.
How Fees Are Calculated and Applied
Most providers use either an asset-based fee or a per-participant fee. The nuance is not only how the fee is calculated, but also how it is applied. For example, if a fee is calculated as a per head fee, is it assessed evenly as a per head fee to all participants or allocated pro rata to participants based on account balance. Plan sponsors need to press for plain language definitions so that committees can follow the math in real-time.
When Details Overwhelm, Get Help
As Matlock notes, committees can feel overwhelmed by the weeds. We suggest getting help and to invest a few minutes in a clear illustration that shows what you are paying today and how it could be structured more reasonably. Facts can come from the recordkeeper, but if disclosures do not give absolute clarity, sponsors should bring in an outside expert to interpret and train the committee.
Fees and Participant Outcomes
Fees are critical in every financial decision, and the first dollar you contribute is the most valuable at retirement. Every amount that your dollar is reduced by fees will have a compounding effect in the years invested until retirement.
Fees are necessary and nothing is free, yet the goal is to understand them and to confirm they are reasonable to ensure every participant, including the sponsor, benefits from better long-term outcomes.
Benchmarking Frequency and Triggers
Fees are not static. We recommend benchmarking about every three years as an industry average. We also advise benchmarking during key plan events, such as acquisitions or divestitures, when headcount or plan complexity changes. Matlock adds that investment fees in particular should be reviewed on a more frequent basis in connection with regular investment reviews.
Avoiding Conflicts in Benchmarking
Many recordkeepers offer to benchmark their own fees, sometimes even using third parties, but Matlock notes it is hard to defend a process where the paid provider validates its own competitiveness. We would suggest that any party running any search should not be one of the organizations who stand to benefit from the outcome.
Defining Reasonable and Documenting Value
What does ERISA mean by reasonable fees? There is no single definition, so committees must be able to justify fees in light of the services they receive. You do not have to pick the cheapest provider if a higher fee provides materially better service and fit.
Matlock provided the metaphor that if you decide the Lamborghini of providers fits your use case, you should have documentation that explains why the value and needs warranted the choice, since process and documentation are your best defense.
Benchmarking vs RFP and Invitation to Compete®
Not every review requires a full RFP. SWBC’s Invitation to Compete® is a patented process that blends the best of fee benchmarking with a targeted evaluation of services. The process starts by identifying your pain points, focusing the market on what you actually need, and evaluating fees in context so you can understand reasonableness.
Leverage Competition Without Moving Your Plan
Matlock notes you can often stay with your current provider while implementing ideas sourced from competitors. We also highlight that competitive bids can help you negotiate better pricing and service with incumbents, which strengthens your compliance file and shows your execution of due diligence. Matlock thinks clients find Invitation to Compete® to be the most efficient vendor evaluation process, as it remains focused on their priorities rather than simply the vendor's capabilities.
Structure, Discipline, and Documentation
Sponsors do not need to fear fees if they have a clear plan. Understand how fees are calculated and applied, benchmark them on a cadence and at key events, avoid conflicts in evaluation, and document why your choices fit your plan’s needs. As Matlock puts it, know the game plan, and as Brad stresses, make the structure, discipline, and documentation your foundation for demonstrating prudence.
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