Benchmarking Services
A Potential Solution to Every
401(k) Plan Fiduciary’s Problem
Marcia S. Wagner, Esq.
I. Current Outlook on 401(k) Plan Fees
Fees are being scrutinized by regulators,
Congress and the plaintiffs’ bar.
◦ Recent explosion in fee litigation, involving
complaints that plan sponsors breached their
fiduciary duties by authorizing the use of plan
assets to pay excessive fees.
◦ DOL has launched regulatory initiative to
improve fee-related disclosures in DC plans.
◦ Congress is proposing legislation to uncover
“hidden” plan fees, including the 401(k) Fair
Disclosure for Retirement Security Act and the
Defined Contribution Fee Disclosure Act.
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Facing Up to the Fiduciary Challenge

Plan sponsors have a fiduciary duty to ensure
the reasonableness of plan fees.

But does the typical employer have the
necessary expertise and resources to make
this determination?

Benchmarking services are potential remedy.
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Scope, cost and quality can vary greatly.
Assessing fees only vs. fees and services.
How can plan sponsors use these services?
Selection of benchmarking service provider?
Role of financial advisor?
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II. Fiduciary Requirements for Plan Fees
ERISA imposes 3 sets of rules regarding fees.
1.
ERISA 403: Establishing of Trust
◦ Plan assets must be held in a qualifying trust.
◦ For “the exclusive purposes of providing benefits
and defraying reasonable expenses” of the plan.
2.
ERISA 404(a)(1): Prudent Man Std. of Care
◦ Similar to ERISA 403 “exclusive purposes” standard.
◦ Must discharge duties with the care, skill, prudence
and diligence that a “prudent man acting in a like
capacity and familiar with such matters would use.”
◦ Thus, plan sponsor must discharge duties regarding
plan fees under a Prudent Expert standard.
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Fiduciary Requirements for Plan Fees
(continued)
3.
ERISA 406, 408(b)(2) – PT Exemption
◦ PT occurs if plan assets used to pay for services.
◦ Exemption applies if:
 “Contracting or making reasonable arrangements”
 “Services that are necessary” for plan operation.
 No more than “reasonable compensation” is paid.
◦ Current DOL reg’s apply facts-and-circumstances
test for determining reasonable compensation.
◦ Proposed reg’s would impose fee and conflictsrelated disclosure requirements (to be finalized
this year).
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III. Penalty for Breaching
Fiduciary Duties

Penalties under ERISA are substantial.
◦ ERISA 409 imposes personal liability for losses
◦ ERISA 502(l) imposes a 20% civil penalty.
◦ Excise taxes on prohibited transactions.
ERISA 502(a) gives participants the power
to sue for fiduciary breaches.
 Growing number of lawsuits have been
filed against employers and providers.

◦ Alleged failure to monitor direct and indirect
compensation paid to providers.
◦ Courts generally cautious in dismissing
lawsuits.
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IV. How Benchmarking Services Can
Help Plan Fiduciaries

Assist the employer in its efforts to identify
all plan fees, including “hidden” indirect
compensation.

Equip the employer with tool to be used as
part of a prudent review process to
monitor the plan’s services and fees.

Provide the employer with competitive
pricing information that a Prudent Expert
might have, to help assess reasonableness.
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Identifying “Hidden” Compensation

GAO prepares report on plan fees (2008).
◦ Employers can not meet fiduciary duties without
disclosure of compensation flowing from plan’s
investments to providers.
◦ Hidden fees include “soft dollar” payments (e.g.,
12b-1 fees, shareholder servicing fees).
◦ Plan sponsor might select “free” services, not
realizing costs are passed on to participants.

DOL Advisory Opinion 97-16A
◦ Fiduciaries must ensure both direct and indirect
compensation is reasonable.
◦ Must obtain sufficient info regarding indirect
compensation to make an informed decision.
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Using Benchmarking Services to Help
Review Hidden Compensation

Benchmarking service providers can work
with plan’s recordkeeper to obtain indirect
compensation info.
◦ Benchmarking services can simplify
employer’s review of direct and indirect fees.
◦ Revenue sharing data can also be used to
confirm reporting for Form 5500 purposes.

New reporting rules under Form 5500.
◦ Requires enhanced reporting on fees payable
to the plan’s service providers.
◦ Effective beginning with plan year for 2009.
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Prudent Review Process to
Monitor Fees
DOL procedural guidance from Information
Letters, proposed 408(b)(2) reg’s and FABs.
◦ Fiduciary must engage in objective process
designed to elicit necessary information.
◦ Must assess:
1) Qualifications of provider,
2) Quality of services, and
3) Reasonableness of fees in light of services.
◦ Soliciting bids is a recognized means for
obtaining necessary info at the outset, but
may not be necessary in subsequent years.
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Prudent Review Process to
Monitor Fees (continued)

To satisfy the DOL procedural guidance,
plan sponsors should:
1) Request updated info about the provider’s
qualifications,
2) Objectively assess provider’s historical
performance, and
3) Use benchmarking services to determine
prevailing rates for similar services.

This simple procedure can be used as part
of a prudent review process.
◦ Much less burdensome than soliciting bids.
◦ Plan’s advisor can assist in implementation.
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Gaining Expert’s Knowledge With
Competitive Pricing Information
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Prudence standard of care under ERISA.
◦ Can not be satisfied with process alone.
◦ Requires substantive expertise.

Reasonableness of fees must be evaluated
with skill and knowledge of a prudent
expert.
◦ Employers can acquire this requisite
knowledge through benchmarking services.
◦ Plan’s advisor can assist in interpretation of
competitive pricing information.
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V. Selecting a Benchmarking Service
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Selection of benchmarking service provider
is also subject to ERISA fiduciary standards.
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Financial advisors should encourage plan
sponsors to inquire about:
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Qualifications of provider
Scope of analysis (all types of fees?)
Ability to identify indirect compensation
Reliability of benchmark data
Size and profile of benchmark group of plans
Benchmarking quality of investments/services
Baseline for comparison (per-participant fees
vs. asset-based fees)
◦ Consulting services
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VI. Interpreting the Benchmarking
Analysis Properly

“What do I do if the benchmarking analysis
says that my plan is too expensive?”
◦ Never consider price to exclusion of other factors.
◦ Sponsors should never conclude services are too
expensive based on benchmarking alone.
Financial advisors should remind sponsors to
review/document quality of services.
 If conclusion is that fees are excessive:
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◦ Renegotiate fees or ask for more services.
◦ Use an ERISA fee recapture account.
◦ Terminate services as a last resort.
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Concluding Comments

Every plan sponsor has a duty to ensure
plan fees are reasonable.
◦ Employers can meet this duty with the
assistance of benchmarking services.
◦ Benchmarking can be included as part of a
broader, prudent review process.
◦ Results of any benchmarking analysis need to
be evaluated in the proper context.
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Advisors can play a crucial role in helping
the plan sponsor:
◦ Select a reliable benchmarking provider.
◦ Develop a simple review process.
◦ Evaluate the plan’s fees in light of services.
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Benchmarking Services
A Potential Solution to Every
401(k) Plan Fiduciary’s Problem
Marcia S. Wagner, Esq.
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.erisa-lawyers.com
marcia@wagnerlawgroup.com
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