By: Kara M. Shadeed, CPA, MBA, General Services and Employee Benefit Plan Supervisor and Michael R. Oesch, CPA, MSA, General Services Supervisor

The Department of Labor issued new reporting obligations impacting the 2009 Form 5500 Annual Return/Report of Employee Benefit Plan regarding fee disclosures on Schedule C. The new guidelines require disclosure of monetary and non-monetary compensation paid from plan assets to individuals, corporations and other parties who provide services, directly or indirectly, to employer sponsored plans subject to the Employee Retirement Income Security Act of 1974 (ERISA).  As fees continue to be a hot topic in the retirement plan industry, fiduciaries should be aware of the expenses paid from plan assets and regularly review total plan cost for reasonableness. 

Total plan cost is comprised of services performed by investment managers, third party administrators (TPA), record keepers, auditors, investment advisors and trust companies. Due to the complexity of costs within a retirement plan, fiduciaries may find it beneficial, and comparative, to focus on total plan cost rather than how fees are allocated to various service providers. It is important to employ an advisor knowledgeable of these fees and how they are paid to determine your total plan cost.

“Plan sponsors need to determine if their total plan cost is reasonable given specific plan demographics that drive total cost: Total Plan Assets, Total Annual Contributions, and Average Participant Balance,” states Ed Farrell, Director of Corporate Retirement Plans at Dorman Farrell, LLC. Total plan cost can be calculated by aggregating investment management fees, any asset charge, any per participant fees, TPA fees, auditing fees, any trust service fees MINUS any revenue sharing offsets and/or plan reimbursement account payments.

When analyzing total plan cost, you should verify whether your plan document allows for all fees currently being charged to the plan.  If seeking to lower fees being billed directly to the plan sponsor, determine if the plan document allows them to be charged to the plan instead.  If not, consult with your TPA to discuss whether the plan document could be amended to allow the plan to pay these expenses. In an average plan, approximately 90% to 95% of total plan cost is paid by the plan, not the plan sponsor.  Therefore, it stands to reason that a reduction in total plan cost rarely results in cost savings to the plan sponsor.

Total plan cost analysis is a prudent examination that plan sponsors may want to consider as they discuss and evaluate plan operations or prepare for upcoming ERISA compliance audits. Regularly calculating total plan cost, and obtaining proposals from other service providers, can aid the plan sponsor in conducting their fiduciary due diligence to evaluate the reasonableness of plan expenses and assist in defending such expenses, if ever required to do so.  If you haven’t identified your total plan cost recently, it would be a wise goal to accomplish this year.

If you have any questions, or would like information regarding plan total cost analysis, please contact your BC Engagement Executive or Ken Douglas, CPA, Partner.