Case study: Engaging employers to comply with fiduciary duties

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By Katherine Smith | 28 February 2017

The challenge

A Milliman client has been growing very aggressively through various business acquisitions in the last decade. Both plan assets and participant counts have quadrupled with the most recent growth in the last couple years. The client’s 401(k) plan service fee schedules have remained unchanged during that period.

Milliman engaged the client to conduct a comprehensive fiduciary review. The primary objectives were to assess the reasonableness of fees incurred by the plan and support the plan’s fiduciary needs on an ongoing basis.

The process

Milliman identified and consulted with the company on three specific areas in which the plan administration and governance could be made more robust:

1. Fee schedules. Two inconsistencies were identified with the current fee structures:

a. The fixed annual base recordkeeping fee was a flat fee based on plan demographics prior to the company’s growth with little change in the last 10 years.

b. The investment advisory fee was based on a fixed percent of plan assets. This was also based on plan demographics and size prior to the company’s and plan’s growth with no modification or change in the last 10 years.

2. Expense allocation. The plan was paying all non-settlor fees and expenses by allocating the fee to participants’ accounts on a pro rata basis. Any revenue sharing received was used to offset plan custodian and recordkeeping fees. However, due to recent growth, the revenue sharing being recaptured was beyond the expenses the plan incurred. Milliman recommended the client explore the following three options:

a. Use the lowest “net cost” share class funds available to them.

b. Rebate any revenue sharing back to the participants.

c. Explore alternative fee allocations that spreads the plan cost equitably across the plan population.

3. Fiduciary plan governance. The company did not have a trustee/retirement committee in place and there was no written investment policy statement (IPS) to oversee plan investments.

The company was grateful for this review and asked Milliman to help address these areas.

Milliman solution

1. Revised fee structures. Based on our industry experience and the assistance of an independent fiduciary benchmark report (Fbi), Milliman proposed the following solutions to the company:

a. Amend the recordkeeping fee structure. There has been considerable growth in the plan operations and complexities due to recent plan growth. Milliman proposed a competitive fee schedule of an annual base fee plus a per participant account fee. This structure provides a level fee to cover the required services the company hired us for along with the flexibility to account for continued plan growth.

b. Amend the advisor’s fixed percent allocation rate on plan assets. Due to the significant growth in plan assets, the asset-based fee was no longer competitive or justifiable. We worked with the client and the advisor to establish a competitive fee that will be reviewed and adjusted periodically to ensure fee reasonableness.

2. Fee leveling and equalization. Currently, some plan fees are offset by participants indirectly from revenue sharing credits generated from investment management fees. In this situation, these fees are non-transparent, not equal, and are dependent upon the funds being selected. Based on the different investments chosen, fees can vary from participant to participant.

Milliman provided the following solutions for fee transparency and fee equalization:

  • Rebate all revenue sharing to participants in the funds who accrue it. Fee leveling makes retirement plan fees more transparent and equal, and irrelevant to the funds a participant selects. In addition, participants will have a clearer understanding of what fees they are paying.
  • Use the lowest net cost fund share classes available in the plan to lower fund investment expenses

3. Set up an effective fiduciary plan governance structure.

Milliman recommended the company add structure to fiduciary governance and perform the following best practices:

  • Have a committed, well organized and effective committee that meets semi-annually.
  • Establish an investment policy statement to assist in selecting and monitoring plan investments.
  • Expect transparency in fees and be attentive to plan costs.
  • Oversee plan administration through routine reviews and discussions with all providers.

Outcome

At the conclusion of this process, the client achieved all of the initial goals, including:

  • Fair and reasonable fee structure
  • Significant reduction in investment expenses
  • Implementation of a fee benchmarking process to ensure fee appropriateness
  • Establishing a Trustee Committee to oversee plan administration on a regular basis
  • Adopting the IPS to monitor plan investments
  • Implementation of fee transparency and fee equalization
  • Development of a program to focus on retirement readiness and adequate income replacement in retirement
  • Overall improvement in client service experience and enhanced partnership with recordkeeper/administrator and investment advisor

These changes served to significantly improve the participant and plan sponsor experience and enhance fiduciary best practices.