Final 408(b)(2) Rule Underscores Need For Plans to Benchmark, Assess Fees

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By Kristen Ricaurte-Knebel  

Plan fiduciaries might want to consider hiring consultants or advisers to help them wade through the barrage of disclosures they will be receiving under the recently finalized service provider fee disclosure rules, Terry M. Connerton, a member of Metz Lewis in Pittsburgh, told Bloomberg BNA Feb. 15.

The Employee Retirement Security Act Section 408(b)(2) rules, finalized Feb. 2, require covered service providers of ERISA-covered defined benefit and defined contribution plans to provide plan fiduciaries with the information required to assess the reasonableness of the total compensation that a service provider receives from the contract, identify potential conflicts of interest, and satisfy reporting and disclosure requirements under Title I of ERISA (22 PBD, 2/3/12; 39 BPR 217, 2/7/12).

One route plan fiduciaries might want to go when assessing the disclosures is benchmarking, Connerton said, which is a tool plans can use to assess the reasonableness of fees and expenses by comparison with other similar plans. Many large plans may already use consultants to determine if the fees paid to service providers are “in line” with those paid by other similar plans, but smaller plans may be at a disadvantage on the benchmarking battlefield, she said.

“Smaller employers have a lot more difficult time, and they probably, for the most part, have not focused in at all on what benchmarking means,” Connerton said.

Craig P. Hoffman, general counsel and director of regulatory affairs at the American Society of Pension Professionals and Actuaries, told Bloomberg BNA Feb. 17 that it has always been a challenge for smaller plans to “judge the prudence of the service they're contracting for,” but that the new rules should ease their burden somewhat.

“It's always been a challenge for small to midsize plan fiduciaries, but … the new regulations should make it easier for them to fulfill their duties,” Hoffman said.

Connerton recommended that plans that have not focused on benchmarking fees in the past hire a consultant to break down the elements of the fee disclosures they receive from the covered service providers, at least in the short-term.

“The way that I approach it is, I believe it, at least initially, would be good if a small to midsize employer could hire a consultant or adviser to explain to them all the different components of the fees, all the different services, sort of analyze their plan to see the different services that are being provided, and to give them some sense as to where their plan fits in the overall scheme of things,” Connerton said.

‘Cottage Industry.'

However, there are some outside sources available to plans that may find the cost of hiring a consultant too steep, she said. Connerton said a “cottage industry” has started to develop in an effort to assist plan sponsors in benchmarking the fees covered service providers will be disclosing to plans by July 1.

Boston-based Dalbar Inc. is one of many companies that is offering such assistance. Dalbar provides retirement plan services, including certification of the Section 408(b)(2) fee disclosures.

Louis S. Harvey, president and chief executive officer of Dalbar, told Bloomberg BNA Feb. 17 that while there has been a lot of talk about what service providers need to do to make disclosures, there has not been much said in the way of what plan sponsors are supposed to do once they receive the disclosures.

“There's a lot going on in the industry that really is working with service providers to make the disclosures, but once the plan sponsor gets the disclosure, there's very little guidance and support for what they ought to do about it,” Harvey said.

“It's one thing to be told, this is what your services, fees, and expenses are, but then the big question is, ‘So what?' ” he said.

Dalbar's fee disclosure certification program “values the intangibles of service, provides an independent evaluation to plan sponsors and creates a critical role for advisors and third party administrators,” according to a news release on company's website. The program evaluates the cost of the plan, as well as the quality of the services being provided, Harvey said, because cheaper does not always mean better.

“If one provider is charging you a dollar and is really providing you with lousy service, and the other provider is charging you two dollars for good service, should you leave the good provider for the bad provider?” Harvey said.

Connerton also said plans need to go beyond evaluating the fees of the service providers when assessing the reasonableness of the plan fees.

She suggested that plans might consider surveying participants to get an idea of their overall satisfaction with the plan, including whether they are happy with investment offerings.

Request for Proposal

Another action Connerton recommended plans take during this time is to do a request for proposal (RFP) from multiple service providers.

“The RFP gives information on conflicts,” and tells a plan what the service provider gains from the relationship with the plan, Connerton said.

Connerton said many plans in the small to midsize market have shied away from doing a request for proposal because they find it daunting. In addition, to have an RFP done by an outside party can be costly, so they decide not to spend the money, she said. But Connerton recommended plans at least go through one RFP.

“If you are going to go through this, at least do it once well and learn as much as you can so that in the future, you set yourself up properly,” Connerton said.

Examining Service Provider Contracts

One area that has not received much attention in all the talk surrounding the final 408(b)(2) rules is the area of service provider contracts. Connerton said plans should examine their contracts with their covered service providers and possibly renegotiate them if necessary.

Smaller plans may have bigger issues with contracts because the contracts are supplied by the vendor, she said, and some plans even may be negotiating their contracts for the first time.

“Contracts are coming generally from the vendor, are never looked at by counsel, many times they don't even exist, or if they do exist, they're at least 10 years old,” she said. From a risk management perspective, Connerton said negotiation especially is important in light of the new final rules.

Plan sponsors should not “sign on the bottom line” without examining the contracts, in part because the contracts often do not favor the plan sponsor, she said. Some contracts even may ask the plan to indemnify the service providers for some actions, she added.

“I don't know that to be the case in every case. But it is important to look at the contract and have it reviewed, even if it's not by an attorney, so that the plan fiduciary understands the provisions and not just signs on the bottom line,” Connerton said.

Connerton suggested that plans negotiate a mutual indemnity clause into their contracts with covered service providers to ensure the covered service provider is responsible for any fees or expenses that may be charged to the plan because of an error on the part of the service provider.

There should “be some kind of mutual indemnity provision which says you're responsible for what you do … because I'm paying you,” she said.

“Almost all service agreements that are provided by the vendors to the plan sponsors do not have a mutual indemnity provision,” Connerton said. “But now I think it's going to be different, and it is important for plan sponsors to look at the contracts and to have them negotiate it.”

For More Information

Terry Connerton will be among the presenters of a Bloomberg BNA webinar scheduled for April 5 on the Section 408(b)(2) final rules. Details of the webinar will be available soon.


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