Often a business owner will start a defined benefit plan to both retain and attract quality employees to their company. Over time, and without some expert guidance, these plans can turn into more of a burden, especially if a company experiences significant growth or is in a high turnover industry.
When speaking with plan sponsors, the three questions that come up most often are:
• How can I reduce my plan costs?
• How can I reduce my fiduciary liability?
• What can I do about terminated employees that are still in the plan?
Plan costs come in three forms, but in some cases, they will overlap: 1) plan administrative costs based on total participant count; 2) investment costs bundled into the net investment return of investments available to participants; and 3) individual services fees based on the optional features included in your plan. An often noted assumption by plan sponsors is that there are minimal administrative costs to a plan, only to dig deeper and find that there is revenue sharing being paid to a third party administrator by way of the investment fees rather than as a fixed cost per participant. The Plan sponsors are charged with the responsibility as fiduciaries of the plan to ensure that the services provided to the plan are necessary and that the cost of those services is reasonable. Thus, transparency is key in understanding all costs incurred within your benefit plan. A survey of defined contribution (“DC”) plans conducted by Brightscope showed that smaller DC plans (those under $10 million) tend to pay between 1.0% to 1.5% in annual expenses, but as high as 4%. Plans over $10 million typically pay no more than 1%, and costs steadily decrease to near .5% as plan sizes near $100 million.
In review of this data, what stands out is the fact that Bundled plans (i.e.-all investment recordkeeping, administration and education services provided by one vendor) tend to cost much more on a percentage basis than Un-Bundled plans (i.e.- plan sponsor is the “bundler” providing in-house support and hand picking independent service providers for all remaining fiduciary needs). A third option is an Alliance model where the plan sponsor chooses a vendor to provide recordkeeping, administration and education, and that vendor has an alliance with partners to provide an array of investment options and other specialty services as the plan requires. The key driver in being cost conscious is focusing on the “reasonable” threshold for plan costs through the reduction or elimination of sales compensation and revenue sharing along with the ability to select less expensive and better performing investment options in an Un-Bundled or Alliance environment.
Fiduciary liability is a term that has been around for years, but has become a front and center focus due to the large number of high profile defined contribution plan lawsuits, and the Department of Labor’s “Fiduciary Rule”. While it is not possible to completely eliminate the fiduciary liability of a plan sponsor, substantially reducing it is part of a methodical process that should be done in conjunction with the hiring of a qualified professional such as legal counsel, CPA, and/or independent investment advisor, the latter of which is addressed under Section 3(21) and Section 3(38) of the Employee Retirement Income Security Act (“ERISA”).
Terminated employees who remain in a plan can create an additional administrative burden. Not only are you required to keep these participants up to date on changes/annual informational releases regarding the plan, including fee disclosure statements, but plans with more than 100 to 120 participants can be subject to audit requirements depending on the type of 5500 tax filing done for the plan and consideration of the 80-120 rule, which adds another layer of cost. It is possible to force terminated employees out of your plan, and thus reduce the overall number of participants, but there are specific steps that must be taken to make certain they have been properly notified and treated fairly and in accordance with your plan’s agreement. Proactively working with your Section 3(21) or Section 3(38) professional to reduce these numbers and keep them to a minimum going forward is key to reducing your liabilities and focusing on maintaining your plan as a beneficial asset to the plan sponsor and its participants.
By Alan J. Conner, CPFA & Laura E. Madajewski, CPA MBA