Fiduciary Risk when Using Industry Average Reports to Determine Fee Reasonableness
This is a very important and often misunderstood issue. Industry average fee data can serve as a good general “second opinion” of fee reasonableness. The industry recognizes that fees can be very plan-centric in nature. National averages may not capture the nuances of plans that drive cost (both in a positive and negative manner). Thus a more tailored approach (such as what is provided in a live-bid environment, like usage of the B3 Provider Analysis™) may not only be best practice, but can be more determinative of what a plan’s actual value on the open market is at any one point in time. The detail of the B3 Analysis can be more determinative of fee reasonableness as it is based on what other providers may actually charge to provide the same services for the specific plan. It is a direct apples-to-apples comparison.
Moreover, benchmarking fees in a vacuum can paint an incomplete picture. In addition to providing benchmarking of fees, the B3 incorporates benchmarking of services and investment opportunities. All three of these elements must be viewed in conjunction with one another to fully vet “reasonableness” of an engagement. Also, the B3 Analysis serves as an educational tool for fiduciaries in addressing the various components of plan fees including revenue sharing.
Based on Department of Labor (DOL) expressed intent and related fee litigation, use of averages and estimates have not been considered sufficient for determining fee reasonableness as they likely do not reflect the specific plan considerations which may impact pricing. The DOL has stated that plans should solicit live bids on a pro-active basis. Only a periodic (every 3-4 years) robust live-bid process, like the B3 Analysis, is most likely to be considered a sufficient and prudent process for determining fee reasonableness by plan fiduciaries.
A related recent case in point involves fee reasonableness litigation against City National where the court found that in City National’s determination of fee reasonableness by use of “…averages and estimates,” rather than directly tracked expenses was not satisfactory.
For more information on benchmarking and the B3 Provider Analysis, please contact your plan advisor.
The B3 Provider Analysis™, RPAG’s proprietary retirement plan fee benchmarking and request for proposal (RFP) system, utilizes live-bid benchmarking to provide a comprehensive benchmarking of a plan’s fees, services and investments in one robust report.