Fiduciary benchmarking

Tom Kmak of Fiduciary Benchmarks talks to HRM about the importance of benchmarking.

There has been a lot of discussion recently about benchmarking of retirement plan fees. Please describe what that entails.

Tom Kmak. Benchmarking a retirement plan entails three important steps. The first is making sure you compare similar plans, or what the industry calls 'making apples-to-apples comparisons'. Second, once you have a similar group of plans, you then need to understand all of the fees you are paying for these plans. So there's a dissection of the fee elements in the equation. Third, you need to make sure you understand what you're getting for what you're paying - a value component that has to be juxtaposed to those fees.

Why is it important for plan sponsors and service providers to understand the importance of benchmarking?

TK. There are three primary reasons. First, the law requires fiduciaries to make sure the fees paid to all service providers are reasonable per ERISA section 404(a)(1)(a). This requirement has been reinforced by regulation 408(b)(2), which will require fiduciaries to receive new detailed fee and service disclosures starting July 16, 2011. Second, the litigation environment surrounding fees is significant. Several prominent firms have settled suits for amounts that run from $16mm to $19mm. And finally, it's just a good business practise. Nobody likes to overpay for a service and the right fee structure can mean thousands of extra dollars to participants come retirement. 

Is this something all plans should be doing or is it really applicable and affordable only for larger plans?

TK. Traditionally, benchmarking really wasn't affordable for a plan that had only a few million in plan assets. Today, really affordable tools like Fiduciary Benchmarks allow all fiduciaries and service providers to assess their fees and the value being received for those fees. Remember, ERISA doesn't differentiate between small and large plans. In addition, the expense for benchmarking a plan through Fiduciary Benchmarks can be paid from plan assets since it is a qualified plan expense. For HR professionals, this means no hit to their budget.

What impact do you think the new DOL fee disclosure rules have on fiduciary benchmarking? 

TK. No doubt they're going to accelerate it as it is part of an inexorably linked chain of events. The desire for transparency led the government to call for disclosure. Such disclosure will lead to questions of 'are my fees reasonable?' And that question can only be answered by looking at something that examines both fees AND value.  In fact, the DOL recognizes this in the 408(b)(2) regulations where they specifically mention this is about reasonable fees, not low fees.

Do you foresee any changes in fee analysis and benchmarking as a result of recent fee-related litigation?

TK. Absolutely. There is a very prominent ERISA attorney who said because of the Caterpillar suit, she believed there were several things that would become best practices for fiduciaries. Specifically, they should know their fees, they should compare them to benchmarks, monitor them on an ongoing basis, have real documentation regarding that process, and make sure they obtain an independent, third-party opinion. On this last point, some service providers give their clients their own benchmarking information. This is a bit like having the fox in the hen house and should probably be avoided. But there is no doubt the litigation will increase benchmarking requests - in fact, we have already seen it in our own business. 

Any final thoughts?

TK. It's a pithy play-on-words, but I think it sums up the situation perfectly: "Let's not lose sight of the forest for the fees". There is no doubt that fees have to be reasonable. The law requires it. It is a good fiduciary practice. It's good business. It helps participants retire better. But if a service provider helps your participants save more, invest better and rollover more, you can mathematically prove they are worth an above average fee.

About

Tom Kmak is CEO and co-founder of Fiduciary Benchmarks, 2007 to current. Prior to founding FBi, Tom Started the JPMorgan Retirement Plan Services business in 1990 with American Century. Upon leaving in October 2007, that business employed 1100 people serving 200 large plan sponsors with over 1.5 million participants and more than $115 billion in assets.