ESOP Planning 2009: Plan Expenses

Most 401(k) plan sponsors have become accustomed to performing a due diligence review of plan expenses every one to five years. This review is done primarily because ERISA provides that qualified retirement plans are solely for the benefit of the participants and that plan expenses must be reasonable. The review also helps ensure that fees as well as the supplementary tools provided are competitive with the marketplace.

Since expenses for most ESOPs are paid outside of the plan, fees are typically not reviewed as closely. However, a due diligence review would still be beneficial. Are the fees that you are paying reasonable? Are they competitive in the marketplace? While it is important to have competent ESOP advisors who you trust, does the cost of using the advisors exceed the benefits that you are receiving? A thorough analysis, which may or may not include obtaining proposals from other firms, could result in lower fees or more included services, and you may not even have to switch advisors to obtain this adjustment.

It is also important to make sure that you are comparing apples to apples. I am sure you have heard that cliché before, but it is definitely relevant with plan expenses. Some advisors charge one fee for all the services you will need, while others charge for each service separately. When you are comparing the overall cost, it is important to make sure you are using the total cost for a particular time period (usually one year). To make things easier for your due diligence review, you should request that all advisors provide you with a specific and detailed estimate of what the total expenses would be for one year.

Some advisors will also bundle into their fees services you do not need or can easily process in-house. You should not hesitate to request a separate quote based on removing functions that you do not need or could process in-house. You may discover that you can significantly reduce your overall fees. At a minimum, you will get a good idea of the flexibility of the advisor.

Another thing advisors may offer is a reduced fee for bundling services for multiple qualified plans, only to increase the fees into your 401(k) or other plan expenses. While this may seem attractive and reduce the company's direct expenses, it may not be in the interests of your 401(k) participants and could be a breach of your fiduciary responsibilities. In A Look At 401(k) Plan Fees, the Department of Labor concludes that all services have costs:

When you consider the fees in your 401(k) plan and their impact on your retirement income, remember that all services have costs. If your employer has selected a bundled program of services and investments, compare all services received with the total cost.

Remember, too, that higher investment management fees do not necessarily mean better performance. Nor is cheaper necessarily better. Compare the net returns relative to the risks among available investment options.

And, finally, don't consider fees in a vacuum. They are only one part of the bigger picture including investment risk and returns and the extent and quality of services provided.

It also addresses the following questions:

• Why Consider Fees?
• What are 401(k) Plan Fees and Who Pays for Them?
• What Fees are Associated with My Investment Choices in a 401(k) Plan?
• Some Common Investments And Related Fees
• Where Can I Get Information about the Fees and Expenses Charged to My 401(k) Plan Account?
• What Other Factors Might Impact the Fees and Expenses of My 401(k) Plan?
• Is There a Checklist I Can Use to Review My 401(k) Plan's Fees?
• What Other Sources of Information are Available?

In addition to price, here are some other factors to consider:

• Quality of service (How often are mistakes made, how are mistakes handled?)
  
• Timeliness of service (Do you get your deliverables when you want them? How persistent do you need to be to get your deliverables on time?)
  
• Technology (Do you get reports, statements, and other information in the form and format that you desire?)
  
• The advisor's background and experience with ESOPs of similar size and complexity
  
• Your relationship with the advisor (Sometimes you cannot put a price tag on trust.)

You should employ a similar process in reviewing all of your ESOP expenses, including your ESOP recordkeeping and administration, consulting, legal, fiduciary, valuation, and audit expenses. In addition to the potential cost benefits, a DOL Auditor stated that they focus on your selection process for choosing a valuation firm, providing another reason for performing a due diligence review of all of your ESOP advisors on a regular basis.

Here are some steps to get the due diligence process started:

1. Review the performance of your current provider. Identify what you like and what you don't like.
   
2. Identify your options. Talk to any other trusted advisors and industry peers for their referrals and ideas. Search the web. Check out your options at local and national conferences.
   
3. Contact the providers. Obtain an informal understanding. Request a presentation of a formal proposal, in person or via web or telephone conference.
   
4. Compare fees and other relevant factors and contemplate the pros and cons of switching to a new provider.

Whether or not you switch, it is essential that you continue to have a process in place to review and monitor all of your service providers on a regular basis.

The ESOP Planning process includes planning for both the current year ESOP administration process as well as the various events that take place over the life of an ESOP. This article is one in a series of ESOP Planning 2009 articles authored by Aaron Juckett. Aaron Juckett is an ESOP consultant and the founder of ESOP Insourcing LLC, an ESOP administration and consulting firm dedicated to providing ESOP companies with a first-class ESOP experience throughout the entire ESOP lifecycle (feasibility and implementation, ongoing administration and compliance, employee communications, distribution planning, and repurchase obligation forecasting). If you need assistance with the ESOP Planning process, please call Aaron at 800-837-3112 or email him at ajuckett@esopinsourcing.com.