Do You Recommend a Fee Policy Statement?

“We include a fee policy statement with all the plans we work with,” says James Holland, director of business development, MillenniuM Investment and Retirement Advisors LLC. Holland tells PLANADVISER that 408(b)(2) regulations brought the importance of fee disclosure to the forefront. Formal fee monitoring, however, dates to the beginning of the Employee Retirement Income Security Act (ERISA). Holland says the firm makes clear to partners throughout their network of 500 advisers that this is an essential building block to a healthy plan.

The Department of Labor (DOL) does not specifically require a plan to include such a document, but, Holland says, “I would argue they already have. They didn’t say put a fee policy statement in place, but ERISA says you have to have some sort of written guideline that shows you’re monitoring plan fees. You don’t have to call it that, but you have to have it.” Since ERISA was initiated, he says, the documentation and the idea have been a part of a workplace retirement plan, and they are an important piece.

“You need some kind of guideline in place to show that you’re documenting,” Holland says. The fee policy statement is a linchpin that ensures a plan sponsor can prove that the firm is looking at all the providers who touch the plan. It can be used to show that the services are necessary, and the fees are reasonable, he says.

The scope of the document could be as simple as a statement that sets forth general guidelines for plan fiduciaries to evaluate and review plan fees, says Sarah Downie, a partner with the law firm Hughes Hubbard & Reed LLP. 

Aid to Compliance

Downie agrees that the statement, in its simplest form, can help a plan sponsor comply with ERISA as well as the fee disclosure regulations. “Or it may be a more elaborate document that helps plan fiduciaries better understand fee allocation among participants and service providers, as well as guidelines for evaluation of fees,” she tells PLANADVISER.

Downie recommends that plan sponsors consider adopting a fee policy statement, but cautions that plan fiduciaries should take care to make sure the document does not impose overly rigid or easily breached standards on plan fiduciaries. Downie says that one potential risk in a poorly constructed policy statement is that the plan fiduciaries could become the subject of litigation or be unable to act consistently with their fiduciary obligations under ERISA.

A fee policy statement can be helpful in meeting fiduciary duty, says Marcia Wagner, president of The Wagner Law Group. “A plan sponsor should explain to participants in advance the 404(a)(5) Disclosure Regulation and the type of information that will be provided,” she says. A fee policy statement can act as a reminder that the plan sponsor monitors and stays current with the plan’s costs and keeps participants informed about the complexity of plan costs and fees.

Holland points out that the fee policy statement can also benefit the adviser. “You’re showing you’re ahead of the curve,” he says. “You’re protecting the plan sponsor, your client.” The fee policy demonstrates the adviser’s value and expertise as it is used to track other covered service providers. Everyone who sees it understands that the adviser is adhering to a valid, prudent process, he explains, so it is a benefit to both plan sponsor and plan adviser.

Advisers and consultants are often engaged to assist plan fiduciaries with understanding plan fees and with creation of this statement, according to Downie. “These providers, as well as legal counsel, may be retained to assist plan fiduciaries with drafting and implementing fee policy statements,” she says.

The Adviser’s Role

According to Holland, the retirement plan adviser should take an active role in the fee policy statement. “Anyone who’s going to assume a fiduciary role in writing would want to help control the process,” Holland says.

Fee disclosure regulations have not yet celebrated their second birthday, and the industry is still in an evolutionary period, Holland says. Fee policy statements will likely become more prevalent for several reasons, he feels. “A lot of people feel 408(b)(2) didn’t do what it was supposed to do. But I think it has. One of the things it has brought about is more people asking questions, so fee policy will become more important. People are going to need to keep track and document fees.”

The use of the title “fee policy statement” has developed post-disclosure, according to Holland, and is now added to the investment policy statement. Fee disclosure regulations helped to push it along, but he says it is not necessarily a DOL initiative. As it is used now, Holland says the fee policy statement is an easy way for plan sponsors and plan fiduciaries to understand all the fees associated with the plan, rather than “some elongated ERISA term.”

Fee policy statements are essential, Holland believes. The statement is a way of being proactive, and it builds credibility. “Anyone who’s going to compete in this space needs to do this,” he says. “You’re talking about participant accounts, and money needs to be accounted for. It helps the plan sponsor understand the value that advisers and consultants bring.”