Over the last few years, we have seen a significant increase in litigation involving the fees paid by retirement plans. However, until recently, no major litigation had occurred in North Carolina.  On March 12, 2014, one of these cases was filed against Winston-Salem-based Novant Health, a large hospital system in the southeast.  This case and other recent litigation should serve as a reminder to retirement plan fiduciaries of the need to monitor their plans’ service provider arrangements.

The complaint against Novant Health alleges that Novant’s retirement plan paid unreasonable fees to the plan’s recordkeeper and to an investment advisor.  The plaintiffs argue that the fees paid by the plan were unreasonable because, among other things, plan expenses increased more than 10-fold in one year without a corresponding increase in services.  The plaintiffs also claim that the fiduciaries breached their duties by failing to leverage the size of the plan to negotiate lower fees and by selecting retail mutual fund share classes when cheaper, “institutional” share classes were available.

While this case is still a long way from being decided, it should serve as a pointed reminder to plan sponsors and other plan fiduciaries that they need to routinely monitor the reasonableness of plan fees and expenses.

If the plan document so provides, a plan can pay its own administrative expenses, but only if the appropriate fiduciary determines that those expenses are reasonable.  Before entering into a service provider relationship, the fiduciary must first make a determination that the services are necessary and the fees are reasonable.  The fiduciary then must monitor the arrangement over time to ensure that it remains reasonable.

The following fiduciary risk-management practices are worth considering for any plan committee or other fiduciary involved in the selection or monitoring of service providers:

• Regularly identify all service providers that directly or indirectly receive fees from the plan.

• Make sure each service provider has provided the plan fiduciaries with fee disclosures required by ERISA.

• Regularly calculate the amounts that each service provider directly or indirectly receives from the plan. 

• Understand what services are provided to the plan for the fees paid.  If one vendor provides both services to the plan and non-plan services, make sure that the plan is not subsidizing any non-plan services.

• Periodically confirm whether the service provider’s pricing is competitive.  This is particularly important as the size of the plan grows because the fiduciary will be expected to leverage the plan's size to reduce fees.  Depending on the circumstances, it might be best to conduct a formal request for proposals from time to time.

• If an advisor questions whether a fee arrangement is reasonable, take prompt action to investigate the issue and determine whether the arrangement is reasonable.

• Make sure that participant communications accurately reflect how plan expenses are paid.

• Document, document, document!  Document the decision-making process used to select a service provider, and document the fiduciary’s monitoring and review process.

These practices will assist the fiduciary in meeting its fiduciary duties and, perhaps more importantly, demonstrate fiduciary prudence to any inquiring party.