Broadcast Retirement Network’s Jeffrey Snyder discusses the proper ways to benchmark your retirement program with Ferenczy Benefits Law Center’s Fred Reish.
Jeffrey Snyder, Broadcast Retirement Network
As I want to kind of get into the legal ease, if you will, not too legal ease for me. But where does the requirement to pay each service provider a reasonable fee come from?
Fred Reish, Ferenczy Benefit Law Center
Yeah, you know, Jeff, it’s, it’s interesting, it comes from several sources. And there are several basic tenets and, and ERISA for the man for how fiduciaries have to conduct themselves to comply. And one of those relates to expenses.
And it’s, you can only pay reasonable amounts as expenses. And that’s found in section 404A of ERISA, which is the sort of, that’s the area that has the prudent man rule. And it says you can only defray, which means pay reasonable expenses.
So that’s a cost rule, you can only pay reasonable costs out of plan assets. It’s also found in 408B2 of ERISA, which is a prohibited transaction rule. And it says, I mean, counterintuitively, it says you can’t pay your service providers.
But then it goes on to say, but you can, as long as the arrangement is reasonable and the compensation is reasonable. And then just coincidentally, in section 4975 of the Internal Revenue Code, there’s a similar limitation, a prohibited transaction under the code, unless the compensation of the service providers is reasonable. So it is, it is embedded in the law.
There’s no doubt about that.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. And just to follow up on that, Fred, and I promise you, I’m not putting you on trial as an attorney. I just want to get to the nitty gritty.
But what does ERISA specifically say about how you determine the reasonableness of fees?
Fred Reish, Ferenczy Benefits Law Center
You know, it’s interesting, the rule about how to determine anything for fiduciaries is actually much broader than just saying, you got to look at fees, you got to look at investments, and so on. What it says is any decision that fiduciaries make, they have to make carefully, skillfully, diligently, and prudently at the level of a knowledgeable person, that is a person who knows about that particular issue, and within the context of providing retirement benefits to participants. So what’s the key words?
Well, I think for our purposes today, it’s that knowledgeable at the level of a person who is knowledgeable about such matters. That’s why that’s sometimes called the prudent expert rule, rather than the prudent man rule. It’s a misnomer, but it is called the prudent expert rule.
So if a plan fiduciary, for example, a planning committee doesn’t know about share classes and revenue sharing and payments behind the screen and all that stuff, then they don’t have the level of knowledge of a person who is knowledgeable about such issues. So they have to work with an advisor or someone like that to help them out. But the key thing is, you have to get that right information in front of you to make a decision.
You have to make an informed decision at the level of a knowledgeable person. Well, if you don’t start with the right information about what the costs actually are, and what the costs for similar services are in a competitive and open market, how can you ever make a good decision? You can’t, because you’ve got apples and oranges, but you can’t compare apples and oranges.
So it’s a tough job. Fortunately, there are services there to help people do it.
Jeffrey Snyder, Broadcast Retirement Network
Let me ask you about, Fred, ask you about the regulators, our friends at the Department of Labor, SEC, some of the other regulatory entities that have oversight of retirement plans. What do they say or what do they say about the reasonableness of these?
Fred Reish, Ferenczy Benefits Law Center
Well, in addition to affirming that you have to look at that, Jeff, they go on to say you can’t look at them in a vacuum. I mean, we’re going to charge you so many dollars for a really small car, or we’re going to charge you the same amount of dollars for a big car, big, expensive foreign race car. Well, obviously, you’re getting two different things in return.
For the one, it might be a bargain. For the other, it’s way too expensive. So you can’t look at fees and expenses and costs in a vacuum.
You have to compare them to what you’re getting in return. What’s the quality of the services? What’s the range of services?
And so on. And they also go on to say that the bottom line is that you don’t have to look at the lowest cost. The rule is not lowest cost.
You can pay reasonable fees for what you get in return. So when people hear about, oh, gee, ERISA requires that you get the lowest cost investment or service, that’s wrong. That’s just dead wrong.
That’s not what the law says. The law says, look at the cost, look at the value of those services or investments to your plan, do a comparative analysis. What does the marketplace charge by and large for that particular service or investment?
Jeffrey Snyder, Broadcast Retirement Network
And lastly, Fred, in terms of the courts, ours is unfortunately a heavily litigated environment, at least in the past decade or so. What have the court said about the reasonableness of fees?
Fred Reish, Ferenczy Benefits Law Center
Well, the court first held that you can use requests for proposals or requests for information, RFIs and RFPs, but you don’t have to. And that’s important for people to understand because going out on an RFI every year, year after year after year, an RFP is incredibly time consuming and expensive. So but the court then turned to benchmarking information and the expert witness on the on the plaintiff’s side of the case said, here’s two big plans comparable to this big plan.
Therefore, and they’re cheaper. Therefore, this plan is too expensive. Wait a second.
There are four thousand seven hundred and seventy plans of that size. You can’t cherry pick two and say that’s that is a statistically valid piece of information for the court to rely on. It’s obviously not.
That’s just. And the other expert on the other side even later testified, oh, yeah, there’s a range of range of reasonableness. But then pick the two lowest cost cases that it looked at, plans that it looked at and said, therefore, the plan, the fiduciaries for the plan that were the defendants.
Therefore, they paid too much. And the judge says that’s ridiculous. You can’t take cherry pick two cases and say that the plan overpaid.
So bottom line is not the lowest. It’s a range of range of reasonableness. And there are, in fact, two other cases, you know, Jeff, to take a little bit of time here that I want to mention.
One is Nunez versus Braun, where they actually referenced fiduciary benchmark as being a source of benchmarking information to the plan committee that the plan committee received. They received benchmarking reports on several occasions. They reviewed them.
They made decisions based on another very similar case, Rodriguez versus Hy-Vee, where the court again pointed to fiduciary decisions benchmarking. Now, I’m saying fiduciary decisions because it’s it is a statistically robust database. I’m not saying that’s the only way anything could be done, but that’s certainly courts have approved that.
And if pushed to it, I could cite other court cases where they’ve rejected other benchmarking services that were inadequate. So part of the job of any advisor or plan sponsor working with a benchmarking service is to make sure they’re working with one that’s going about doing it right and has a robust enough database. Anyway, in conclusion, just the last thought on that Rodriguez case, the court said they granted summary, referred to another case that granted summary judgment.
And the court said that second court said, even though the committee did not bid out recordkeeping services, the committee performed prudently because it regularly conducted considered recordkeeping costs. It received benchmarking data and obtained price concessions from the recordkeeper as a result. In other words, if you’d go about doing this right, the court cases have said, hey, we’ve looked at this.
That is part of a prudent process. And and a committee can satisfy their duty of prudence using benchmarking services and possibly other things. But in those cases, benchmarking services.
Jeffrey Snyder, Broadcast Retirement Network
Yep, it’s all about the tool you use, Fred, always great to talk to you.
Thanks so much for joining us. And look, we look forward to having you both back on the program again very soon.