Donal K. Ford
PINNACLE FINANCIAL SERVICES, INC.

An increasingly important facet of multiple employer 401(k) plans is average plan expenses. Because litigation in this realm is increasing, an awareness and understanding of the issue is more and more critical to PEO managers of such programs. In general, plan expenses can be classified in four ways:

• Plan level services, including initial plan design and any subsequent changes, which must be paid by the PEO or client;
• Investment fees, usually the largest single plan expense and almost always paid by the participant;
• Individual user fees for specific services, such as loan processing or distribution fees, usually paid by the participant; and
• Plan level services that benefit the participant, such as enrollment, administrative, legal, and accounting services, which may be paid by the PEO, the client, the participant, or some combination of the parties.

In one small sampling of businesses that I did, the nature of the responses and the level of understanding varied widely. While this ad hoc exercise was too small to draw any general industry conclusions, the results should give those involved in plans a wake-up call. I was surprised that some did not know the expenses related to the initial plan design and subsequent changes. Investment fund fees varied from .2 to 1.80 percent, but some respondents were not familiar with fund expenses. New client adoption fees ranged from $0 to $1,000. Loan fees ranged from $0 to $100 setup, plus $50 annual servicing. Distribution fees ranged from $0 to $150. It was apparent to me that some had not actively researched or analyzed where their programs were with regard to the market.

I found participant account fees paid by the participant that varied from $25 to $40 per year. Some had base fees per client in addition to the participant account charge. Base and minimum fees varied dramatically per adopting employer.

The most disconcerting finding of the survey was the number of respondents who checked “Don’t know” as their response to items. That simply is not where PEO’s need to be today. Given the current regulatory and litigation-prone environment, a fiduciary’s failure to know could become very costly. Sitting back and putting everything on “auto-pilot” is not an acceptable mode of operation.

In the wake of Enron and other retirement plan failures, the Department of Labor (DOL) launched “Getting It Right—Know Your Fiduciary Responsibilities” in 2004. One aspect of the program focused on the fiduciary’s responsibility to monitor and control plan expenses. The DOL’s discussion can be found at www.dol.gov/ebsa/publications/undrstndgrtrmnt.html. This site also includes links to a sample 401(k) plan expense disclosure form.

In the last few months, a wave of class action suits against plan sponsors and investment companies has been filed. These suits allege that the plan sponsor, investment committee, and/or the investment company breached its fiduciary duty to the plan participants by failing to adequately disclose, monitor, and control plan expenses.

Multiple statutes, including the Employee Retirement Income Security Act (ERISA) and the Uniform Prudent Investor Act, mandate fiduciary oversight of plan investments, including associated expenses. The standards of fiduciary conduct require that all decisions be made in the best interest of the plan participants. Failure to meet the fiduciary standards can result in both corporate and personal liability for the fiduciaries involved.

For your PEO 401(k) plan, fiduciaries include the PEO as plan sponsor, the plan trustee, the plan administrator, and the members of the plan’s investment committee. In addition, the board of directors or corporate officers who have authority to name or the responsibility to monitor the fiduciaries are also fiduciaries.

For those fiduciaries who want to benchmark their current fiduciary practices, an excellent online tool is available at http://safe.actifi.com/home_type.php. Designed by fi360TM and the Centre for Fiduciary Excellence, the “Self Assessment of Fiduciary Excellence” (SAFE) is a series of 22 questions that assesses your global fiduciary practices. After completing the online questionnaire, you can print a report that concisely describes the areas of fiduciary practices that require further investigation.

At present, I am not aware of a single point of reference regarding average plan expenses for multiple employer 401(k) plans. Present information indicates that there is wide variation and highly customized pricing. This is likely because PEO multiple employer plans vary from plans with a handful of adopting employers and less than $1 million in assets to plans with hundreds of adopting employers and more than $50 million in assets.

The lack of a single benchmark, however, doesn’t abrogate the fiduciary’s obligation to act. Given that a fiduciary breach can result in personal liability, the prudent fiduciary should have easily accessible written documentation demonstrating his thorough knowledge and understanding of the plan’s expenses and an ongoing monitoring process to ensure the expenses are appropriate in light of the services provided. Those responsible for the PEO 401(k) plan should periodically review plans and operations, and should consult not only with their provider but also look to other plans, educational materials, and even outside experts for assistance in assuring that they are adequately managing and protecting the interests of plan participants.

Donal K. Ford is a Certified Pension Consultant and Accredited Investment Fiduciary.TM He is the president of Pinnacle Financial Services, based in Lantana, Florida, and has more than 12 years of experience in the PEO 401(k) industry.