How a 401(k) fee policy statement can help protect you
A 401(k) plan needs many services, including recordkeeping, administration, and investments—each of which carries a cost. As a plan sponsor, monitoring and evaluating these costs is your ERISA fiduciary responsibility, which means you need to establish a process to make sure you’re fulfilling it. That’s where a fee policy statement (FPS) comes in. In the following, we outline how to put one together and keep it current.
Under ERISA, you have a fiduciary duty to follow a prudent process when evaluating fees for services and investments. But ERISA doesn’t define that process—that’s up to you. This is why a formal document explaining how you’ll monitor fees and ensure their reasonableness is important.
What’s a 401(k) FPS?
An FPS, like an investment policy statement (IPS), is a road map for making decisions and monitoring results. But whereas an IPS guides you in picking and monitoring investment options, an FPS guides you in monitoring investment fees and ensuring that they’re reasonable.
ERISA doesn’t require either an FPS or an IPS—or provide guidance on what they should contain; however, ERISA does require that you understand your plan’s fees and that you take steps to make sure they’re reasonable relative to services provided. That’s where an FPS can help.
What your 401(k) FPS should contain
To help fulfill your fiduciary duty to monitor fees for reasonableness, you may want to include four key sections in your FPS.
Section #1—The types of fees incurred by your plan
This should consist of a list of services that charge a fee. Examples include:
- Recordkeeping and administration
- Education and communication
- Professional services
- Transactions (e.g., loans, distributions, and QDROs)
You can find this information in your recordkeeping service agreement, as well as in contracts you have with your accountant, auditor, and investment advisor.
Section #2—A description of expense allocations
Services can be paid for by the plan sponsor or by participants. Your FPS should state how your 401(k) plan allocates those fees.
Your retirement plan provider may charge fees for participant transactions, such as a hardship withdrawal or a loan, and for plan services (e.g., recordkeeping, education, communication, and professional services). You may cover all fees, have participants pay their transaction fees, or you can allocate plan fees to participants according to a formula. If you charge participants for any plan fees, you’ll need to decide how to allocate them. Generally, you have three main options:
- You can charge each participant the same flat dollar amount on a regular basis (e.g., deducted quarterly);
- You can allocate the fees proportionally, with a percentage fee based on participants’ assets; or
- You can use revenue sharing from funds that share expenses with service providers.
You may also choose a combination of some of the these options. The method you choose depends on your goals as a plan sponsor and your feelings about fee fairness. Whatever your decision, you should include a description of your fee allocation process in your FPS.
Section #3—Your process for monitoring fees
ERISA says that you have to both understand your fees and have a process for determining that they’re reasonable. Understanding fees means knowing what they are, which you’ve covered in section #1 of your FPS. Reasonability is trickier. ERISA doesn’t define what’s reasonable, but benchmarking your fees—comparing them to those charged for similar services—is a widely accepted practice. As part of your benchmarking exercise, you may want to request bids from competing providers from time to time. Whichever yardstick you use to measure reasonableness, you should spell it out clearly in your FPS.
Section #4—A statement of your revenue sharing policy
Revenue sharing refers to the paying of service provider fees using investment fund revenue. A plan sponsor can also use revenue sharing to fund an ERISA budget or plan expense reimbursement account (PERA) to pay for services such as extra meetings or participant mailings. Alternatively, a plan sponsor can employ revenue sharing to lower participant investment costs by refunding them to participants.
Revenue sharing is a plan asset. As such, ERISA requires that you monitor it and use it prudently. So, however you apply revenue sharing, you should formalize your practice and monitoring process in your FPS.
Stay true to ERISA with help from an FPS
Your 401(k) plan’s services come with costs, which ERISA says must be reasonable and monitored according to a prudent process. An FPS can help you keep track of those costs by listing all expenses and describing who pays for them. And it can help protect you as a plan sponsor by formalizing the process you use to monitor fees and ensure that they’re reasonable.
Once you’ve put an FPS in place, with the help of your financial professional or recordkeeper, make sure you review it periodically—documenting your review and process—in case you’re ever called on to defend your fees.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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