Monitoring and Disclosure of Fees for Defined Contribution Plans

Type: 
Best Practice
Approved by GFOA's Executive Board: 
October 2012
Background: 

In carrying out their responsibilities as fiduciaries, sponsors of state and local government defined contribution (DC) plans make decisions in the best interests of plan participants and beneficiaries. In making these fiduciary decisions, plan sponsors need to understand all the fees and expenses that are charged to the plan and to participants, and ensure that these costs are reasonable. Plan sponsors also need to give participants adequate and accurate information about the fees and expenses that affect their account balances.

The fees paid by public and private DC plans have been the focus of congressional, regulatory, and public scrutiny. In particular, the U.S. Department of Labor (DOL) has issued rules under the Employee Retirement Income Security Act (ERISA) about the disclosure and transparency of fees charged to DC plans and participants.1 And while the ERISA rules are not binding in the public sector, they may provide guidance for best practices. GFOA members are encouraged to review the DOL’s rules on fees and disclosures when developing these practices, as well as the following recommendations below.

Recommendation: 

GFOA recommends that plan sponsors make sure that DC plan costs are reasonable and appropriate, compared with plans of similar size, structure, and service levels, and that they provide plan participants with meaningful and accessible information about fees and expenses. These policies and practices should ensure that plan sponsors:

  1. Thoroughly review and document the process used in selecting DC plan service providers and the types of fees charged.
    1. Require service providers to disclose:
      1. All compensation arrangements, both direct and indirect, for themselves, their affiliates, and/or subcontractors.2 Require the service provider to fully disclose such arrangements on plan websites and in plan documents and investment materials sent to participants.
      2. Fee-related disclosures should include:   
        1. Investment fees, which include fees associated with management of the plan’s investments.
        2. Plan administration fees (including fees for record keeping, communications, education, and the plan’s professional advisors).
        3. Transactional fees, which include  expenses charged against a participant’s or beneficiary’s individual account (such as  loans, annuities, brokerage accounts, qualified domestic relations orders, front or back-end loads or sales charges, and redemption fees).
    2. Service providers, especially providers that are experienced with ERISA plans, can help with developing disclosure policies and procedures. Plan sponsors might also want to reconsider a relationship with a provider that refuses to provide disclosures or to assist with disclosure policies and practices.
    3. Reevaluate fee disclosure practices regularly to assure compliance with applicable state and federal regulatory requirements and best practices.

  2. Review and verify actual fees at least once a year to make sure the provider is not overcharging.
    1. Consider issuing a request for proposal (RFP) to ensure the plan is getting competitive fees.
    2. Consider using an independent consultant to review and report on the reasonableness of the service provider’s fees. Independent benchmark studies provide one way to evaluate fees.
    3. Monitor plan service providers for potential conflicts of interest at least once a year, or when there is a material changes in circumstances (such as a merger). Plan sponsors might also want to request an affidavit from the service provider that affirms there are no conflicts of interest or reveals any actual or potential conflicts.

  3. Provide plan participants with meaningful and accessible information about fees and expenses at least once a year, along with other information participants need to make sound investment decisions.
    1. Fee-related information, including the role fees play in investment returns, should be disclosed and communicated in a way that non-investment personnel can understand. One way to provide this information is to send individual participants annual statements with personalized fee disclosures.
    2. Include whatever additional disclosures participants will need to evaluate the investment products offered:
      1. Past investment performance.  
      2. Risk and investment objectives. 
      3. Appropriate fee benchmarks for each investment category (domestic bonds, domestic large cap equities, emerging markets, etc.).
      4. A glossary of terms.3
    3. Provide information on Web sites for easy access.
    4. Communicate fee information when participants enroll in the plan and inform them annually about how they can receive updated information.
    5. Review the effectiveness of these communications regularly, perhaps using an outside consultant.
Committee: 
Retirement and Benefits Administration
Notes: 

1 See U.S. Department of Labor’s Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-type Retirement Plans at http://www.gpo.gov/fdsys/pkg/FR-2010-10-20/pdf/2010-25725.pdf, and the U.S. Department of Labor’s Final Regulation to Service Provider Disclosures Under Section 408 (b)(2) at http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=25781.

2 Direct compensation is compensation received from the plan sponsor or paid directly from the participants’ accounts. Indirect compensation comes from any source other than the plan sponsor, participants’ accounts, or the service provider’s affiliate or subcontractor.

3 The Pension Protection Act of 2006 requires quarterly benefit statements to include a notice directing participants to a U.S. Department of Labor website on individual investing and diversification (http://www.dol.gov/ebsa/investing.html ).

References: 
  • Mindy L. Harris, President, National Association of Government Defined Contribution Administrators, Testimony before the House Ways and Means Committee, Hearing on the Appropriateness of Retirement Plan Fees, October 30, 2007.
  • A Primer on Plan Fees, American Bankers Association, et al, October 18, 2007.
  • Defined Contribution Fee Disclosure Best Practices, The Committee on Investment of Employee Benefit Assets, Association for Financial Professionals, June 2007. 
  • Scrutinizing DC Plan Fees and Expenses for Transparency, Awareness and Disclosure, The Segal Company, May 2007.