Recordkeeping Fees Under the Microscope

Responding to PLANADVISER’s coverage of the recently revealed fiduciary breach lawsuit settlement entered into by the Massachusetts Institute of Technology (MIT), a reader sent the following query: “I noticed in the MIT lawsuit you reported that one of the non-monetary provisions was that fees paid to the recordkeeper for basic recordkeeping services will not be determined on a percentage-of-plan-assets basis. I assume MITs plan’s size [approximately $3.8 billion] was the reason that this was objectionable?”

The question sounds straightforward, but it actually keys into a complicated debate that is unfolding in the retirement plan industry about the appropriate way to pay for recordkeeping under the Employee Retirement Income Secuirty Act (ERISA). ERISA demands, among many other things, that fiduciary retirement plan sponsors carefully evaluate and monitor the reasonableness of fees being paid by their participants. The law does not stipulate, however, that one specific type of fee structure is superior in itself, nor does it suggest all prudent plan fiduciaries must run their plans the same way.

Taking a step back, the reader is right in that the general wisdom in the retirement plan industry was for a long time that small plans could reasonably pay for recordkeeping on a percentage-of-assets basis. Because 401(k) plans and accounts generally start out quite small, this approach makes for a good deal for new plans/participants, at least at first. Down the line, growing plans or those starting out with substantial assets can negotiate for per participant fees. But historically, even many large plans have long paid for defined contribution (DC) plan recordkeeping on an asset-based schedule.

Today, the landscape is rapidly shifting, and it definitely seems to be the case that per-participant recordkeeping fees are becoming the expected best practice, no matter what size the plan. Plaintiffs’ attorneys and progressive plan sponsors are driving this trend. Their argument is simply that, with today’s digital recordkeeping technology, it is no more work for the plan provider to administer an account with $1,000,000 versus an account with $100. Thus, the argument goes, it is not reasonable under ERISA for the fee to grow while the service being provided remains the same.

ERISA experts say the issue of what constitutes fair and reasonable recordkeeping fees is actually quite complex. One cannot simply say in isolation of other crucial details that one method of payment is better. In fact, some observers argue that asset-based fees are actually in a sense fairer and more progressive, in that participants with small balances pay less in fees relative to those people who have large accounts and presumably are wealthier. In the end, as explained by ERISA attorneys and judges ruling in ERISA cases, most important is that plan sponsors deliberate carefully and document their decisions—that a prudent process is followed in creating and then monitoring whatever fee structure is ultimately used.

Per Participant Fees Can Still Be Excessive

Theory aside, plaintiffs in ERISA lawsuits are having success arguing in favor of per-participant fees. Especially when cases have settled, as in the MIT affair, fiduciary plan sponsors are agreeing to engage in request for proposal (RFP) processes that will specifically demand recordkeeping fee schedules organized on a per-participant basis.

One pending proposed class action lawsuit, filed in August against TriHealth Inc.’s DC retirement plan, shows that per-participant fees can also be excessive—at least in the eyes of participants and their attorneys. The ERISA lawsuit suggests that the administrative fees charged to plan participants at TriHealth “are greater than 90% of its peer plans’ fees, when fees are calculated as cost-per-participant or when fees are calculated as a percent of total assets.”

The complaint shows that in 2017, for example, TriHealth’s plan carried a cost of 86 basis points per participant. This compares with the mean of 44 bps across 27 peer plans, plaintiffs argue. As a total of plan assets, in 2017, TriHealth’s plan cost 86 bps compared with a mean of 41 bps. For context, TriHealth’s plan was benchmarked against peer plans with an asset range of $250 million to $500 million.

“The total difference from 2013 to 2017 between TriHealth’ fees and the average of its comparators based on total number of participants is $7,001,443,” the complaint states. “The total difference from 2013 to 2017 between TriHealth’s fees and the average of its comparators based on plan asset size is $7,210,002.”

When the wave of excessive fee cases began against retirement plan sponsors, most targeted large or mega plans, based on assets. More recently, a number of cases have been filed against so-called “small” plans. For example, the Greystar 401(k) Plan, with less than $250 million in assets, was the target of a complaint filed earlier this year. Similarly, fiduciaries of the approximately $500 million 401(k) program offered by Pioneer Natural Resources USA settled a lawsuit that was filed in 2018.