Let’s be Reasonable: 408(b)(2) Fee and Service Evaluations

Due to 408(b)(2) regulations, we are living in a new age of responsibility for determining the “reasonableness” of fees and services in ERISA retirement plans.  After the distraction of formatting and distributing the 404(a)(5) disclosures to employees, it is now time to turn our attention back to the required evaluation of reasonableness of services and fees.

Why should fees be reasonable?

One of the primary duties of a plan fiduciary, as defined by the Department of Labor, is to pay only reasonable plan expenses. There is no option to ignore this requirement. In just the final 408(b)(2) regulations alone, the Department of Labor used the word “reasonable” 93 times. Of these, 41 uses of “reasonable” specifically referred to fees, compensation, contracts, and arrangements. However, this concept of plan and service “reasonableness” has not been defined. Fiduciaries, providers, participants, and presumably, regulators, are left to define this term for themselves and their plan.

After reviewing the common use definitions of the word, and in looking closely at how the word is used in the regulations, we have come up with our own definition of reasonable under 408(b)(2):

Reasonable (as it applies to fiduciary decisions under 408(b)(2)):  Prudent arrangement or contract for investments or services with moderate and fair (inexpensive) cost or compensation.

Inexpensive is noted in parentheses as it is the implied default criteria without justified increased value from services.

So now that we have a better idea of where we are going, we need to look at how to get there.

Cost, Services, and Value

When asked if he wanted his pizza cut into four or eight slices, Yogi Berra once replied, “Four. I don’t think I can eat eight.”

One of the front burner items in the 408(b)(2) regulations is determining the cost for each of the services provided. Because of the disclosure of direct and indirect compensation arrangements, a plan that once looked like it had four slices now may look like it has eight. The pie is the same size as it was, now it just  has more definition. Each plan will require and desire different levels of services. It is clearly not the intention of the Department of Labor (DOL) for everyone to have a bare bones, lowest cost retirement plan. It is understood that various services can enhance communication of investments and understanding by participants, and other services can assist participants in creating appropriate portfolios. The DOL is clearly serious, however, about ensuring reasonable compensation in plans and is on the lookout for potential self dealing or conflicts of interest by plan sponsors and service providers.

Future blog posts will look more closely at cost considerations, service models, and the goal of establishing a prudent process of evaluation for fiduciaries.

John Hare, AIF®, is Director of Retirement Plan Services for Flautt Hare Davis Wealth Advisors Retirement Consultants in Brentwood. He has helped retirement plan fiduciaries better understand, implement, administer and communicate their plans for over 22 years. PRUDENT PROCESS ™ Spectrum of Plan Success includes proper plan governance, detailed investment analysis, and participant engagement.

More information and a full white paper “The Age of Reasonableness” can be found at http://www.prudentprocess.com

Yogi Berra quote from The Yogi Book: I Really Didn’t Say Everything I Said by Yogi Berra.

Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC. Other advisory services offered through Independent Financial Partners (IFP), a Registered Investment Advisor. Flautt Hare Davis LLC and IFP are separate entities from LPL Financial.

330 Mallory Station Rd. Suite A-2  Franklin, TN 37067 Phone: (615) 661-8828 Fax: (866) 661-6252 Email: jim.davis@fhdfinancial.com

Website Design For Financial Services Professionals | Copyright 2018 AdvisorWebsites.com. All rights reserved