Fees for what?


There has been a lot of conversation about the fees paid by retirement plans. Most of that attention has been paid to the level of the fees. The implication seems to be that a high fee is bad and a low fee is good. That would be true if the service being delivered was exactly the same, but that is rarely--dare I say--never, the case. So, we know that it is tough to even decipher the level of certain kinds of fees. Let's say that some system is devised to inform decision makers of the exact fees that they are going to pay. Those decision makers still need to decide whether that know fee is "reasonable" for the services being rendered.

It should be obvious what services are being rendered. For investments, it may be access to that investment and tracking that information by participant. But, what about other services - TPAs, claims administrators, trustees, attorneys, accountants? I have lost count of the number of meetings I have been in where some plan has incurred a testing failure. The plan sponsor was sure someone else was supposed to be doing this and all of the advisors believed that another advisor was doing it. In my dream world, all benefit plan sponsors would have competent ERISA counsel. Said competent counsel would give the sponsor a written list of all of the duties that were required to operate the plan. Said list would be periodically updated for changes in the law. Each advisor would have a contract with the sponsor where they affirmatively take responsibility for assisting the sponsor with one or more of those duties. The sponsor would have 2 or more people assigned to oversee these service providers.

Even that idealistic dream world has a problem. How does the sponsor know whether the advisors that they have selected are actually competent to do the job assigned to them?

Last fall the DOL announced their "Consultant Advisor Program," see http://pubs.bna.com/ip/BNA/PEN.NSF/5e4e99760472d68285256b57005a3bcc/6e80eff6edcb2c8e8525721700797cc8?OpenDocument and http://pubs.bna.com/ip/BNA/PEN.NSF/5e4e99760472d68285256b57005a3bcc/76088bb353741bda8525721700797caf?OpenDocument for a discussion of this program. This program focuses on one quality component - the risk of a conflict of interest between the plan and the advisor. That is an important element - objective advice should be better. To date, however, there has been little additional discussion of this program.

So, back to the issue - how does a plan sponsor determine whether they are paying a reasonable fee for competent advice? I can only respond from my experience as the accountant:

Retirement plan administrators, claims administrators and certain fund managers or trust departments: There is an accounting industry product - the SAS 70 report. This is Statement on Auditing Standards No. 70 - Reports on the Processing of Transactions by Service Organizations. This is an audit of the internal controls of a service organization. A Type II SAS 70 report assess the nature of the internal controls AND whether or not they are actually working as designed. These are typically very long and pretty boring reports, but if a service provider has such a report, the report tests the procedures that apply to your situation and there were no exceptions found in the test, the sponsor may have some comfort about that service provider. There is no requirement for TPAs or claims administrators to obtain such a report. The absence of such a report doesn't mean that their systems are flawed. But the presence of a clean report should provide some sense of confidence.

Note, many service providers have multiple control systems - one might handle the investment decision processing, one might handle testing, another might handle distributions. To take comfort from the existence of a clean SAS 70, you need to make sure that such a report exists for the systems that your plan uses.
Auditing firm - Taking comfort from the SAS 70 sounds nice, but that is a report prepared by an auditing firm, where can you get some sense of confidence that the auditing firm is skilled at what it does? Within the benefit plans community, the American Institute of Certified Public Accountants has created the Employee Benefit Plans Audit Quality Center. CPA firms can join this center. To be a member the firm must make a commitment to train their benefit plan audit teams, conduct an annual review of the benefit plan audit practice and otherwise stay engaged in the industry. Membership in the audit quality center is not a stamp of approval, but in a recent DOL audit of benefit plan auditors, the DOL did find significantly fewer audit issues with the work of center members than with non-member auditors.

The Center's web page is: http://ebpaqc.aicpa.org/ It contains a lot of helpful information that a plan sponsor can use in evaluating an audit firm. In addition, the DOL issued a tool to assist plan sponsors in selecting an auditor. See http://www.dol.gov/ebsa/publications/selectinganauditor.html
For other professions, I don't know what to say. The credential sponsor Financial Service Standards, LLC invited retirement advisors and plan sponsors to participate in a short "Retirement Credential Survey," last February. This is expected to generate a 2007 Retirement Credential Comparison Chart to be published in May. It will be interesting to see what, if anything, comes from this effort.