Broadcast Retirement Network’s Jeffrey Snyder discusses how to benchmark retirement plan fees and expenses with Fiduciary Decisions’ Tom Kmak.
Jeffrey Snyder, Broadcast Retirement Network
Joining me now is Tom Kmak. He is the Chief Executive Officer for Fiduciary Decisions. Tom, it’s always great to see you.
Thanks for joining us on the program this morning. It’s a pleasure, Jeff. Thanks for having me.
Yeah, and look, we really appreciate having you on the program because you bring such a depth and breadth of experience. Tom, fee reasonableness, I can’t think of a more litigious time in our industry about fees and fee reasonableness. We’re going to get to Fred’s conversation in a few minutes, but is there a way that you can really boil down this concept and this litigiousness into one easily understandable concept?
Yeah, it’s a great question, Jeff.
Tom Kmak, Fiduciary Decisions
Fiduciary Decisions has an ERISA litigation database that tracks every single fee lawsuit that’s been filed since 2006. And we totaled up the fines and settlements the other day from about 250 cases. So about 250 of the 800 have reached some type of monetary settlement, and the total amount is $2.33 billion. That’s how much it’s cost the industry just in dollars, not time spent. So yes, it is the most litigious issue in the history of the industry, and it’s not slowing down.
Jeffrey Snyder, Broadcast Retirement Network
No, it’s not slowing down. We can talk about the Department of Labor proposed regs maybe another day because I think it tries to address some of that. But I didn’t realize it was such a large amount when you put it in those terms.
I mean, it really hits home and that impacts retirement savings and the ability to deliver services. You saw Fred Reich, a mutual acquaintance of ours, was on the program last week. He really talked about what is required and not required.
Did you have any thoughts? You watch the show, of course, like so many do. Did you have any thoughts about his appearance?
Tom Kmak, Fiduciary Decisions
Yeah, there’s a couple of things that I wanted to reiterate to the audience in case they missed it. And there’s a handbook from the DLL called Look at 401k Plan Fees. And the conclusory paragraph has a couple of things that are really important.
One is, remember that higher investment management fees don’t necessarily mean better performance, nor is cheaper necessarily better. So the deal is specifically saying with respect to investments, do the best that you can on your lineup. And I think the release on the alt investments is part of that.
Get the best returns you can for your participants. And the second part about that, Jeff, is that the conclusory sentence is incredibly helpful. It basically says don’t consider fees in a vacuum.
They’re only one part of the bigger picture, including investment risk and returns and extent and quality of services provided. So the DLL is telling everybody, look, this is not a fee only discussion. You have to consider the value side of the equation.
Now, the other thing that’s been interesting on this is what the courts have said. So I was the expert witness in the better health case, which was just fascinating. And Judge Martinez in May of 2020 issued his summary of findings.
And there are a couple of things in there that were great. In paragraph 140, he clearly says this process may but is not required to include an RFP or RFI. And other court cases have said the same thing.
And that’s basically what Fred said by the last time. But the thing that he said that I really want the audience to understand is that he basically said that all the per participant fee ranges by the plaintiff’s expert would have been reasonable. But when he calculated his damages, he used the lowest number.
So Judge Martinez said, no, that’s not the way to do it. The way to do it is be reasonable and says a range, not a point. So those would be the four things, right?
Marketing is a rule of three or four. But those would be the four points I really want the audience to take away from the legal side of the equation.
Jeffrey Snyder, Broadcast Retirement Network
And just to kind of follow up on that, I mean, the DLL, as you said, has basically stated it’s not just about fees. It’s not the lowest fees. There’s more to it.
Is there a reason for that? I mean, when you kind of dive deeper into their thinking, is there a reason for that?
Tom Kmak, Fiduciary Decisions
Yeah. The answer is it’s basically mathematics. We have on screen here a sensitivity analysis where you can see a typical individual that is about 44 years old and has an average account balance contributing 6% with a 50 cent match and returns of about 7%.
And if you conduct a sensitivity analysis on the variables that determine retirement income, you’ll notice that the base case is about $3,983. If we raise the deferral by 20% from six to 7.2, it’s 4,400. If we increase the match from 50 cents on the dollar to 60 cents, it’s 4,124.
If the returns go up by 7% to 8.4, yeah, that’s pretty high. It’d be $5,059, but it shows the incredible importance of having a great advisor and someone that helps you with your lineup. And if you cut the fees from $165 a head to $132, a full 20% reduction, your economics go from $3,983 per month to $3,992.
$9 is the impact of cutting the record keeper fee by 20%. And then of course, if you do all of them, it winds up with about $5,800. So there’s a mathematical reason that the DOL said, don’t consider fees in a vacuum.
You have to improve savings rates, investing behavior, stop people from taking money out of the plan before they retire. All these things absolutely trump the lower fee. And that’s why they said that, because they know the math of the problem.
Jeffrey Snyder, Broadcast Retirement Network
So plan sponsors have a duty to look at the reasonableness of fees, Tom. How do you think they should think about the process that they undertake to find the reasonableness?
Tom Kmak, Fiduciary Decisions
Yeah. There are certain mental models that I keep in my head overall on my life. And one of them is, when you have a project, it’s scope, time, budget.
A benchmarking assessment is scope, time, budget. So on the scope side, you’re looking at quality of the provider, the services they deliver, the value they’re giving to the sponsor participants, any extras, fees, and the course time is time to complete. And the budget is out-of-pocket costs and soft costs.
Like what else could I be doing instead of spending my time visiting six firms on the road? So it’s a scope, time, budget analysis like any other project, Jeff.
Jeffrey Snyder, Broadcast Retirement Network
So Tom, as you know, I’ve done many of these types of projects and I’ve been involved in that and some would argue maybe too many. But in all seriousness, what are the different ways you can complete this process? Because there are lots of different ways to do it.
Tom Kmak, Fiduciary Decisions
Yeah. We’ve been doing this, as you know, since 2009 when we released our first report. We issue, I don’t know, 50,000 or so reports a year, a huge number.
I like to think of it on a spectrum from less effort to more effort. So on the less effort side, you could ask your provider for their data. You could do a survey-based type of thing.
Some of those services exist in this space. You could do solid benchmarking like we do on the fee and value side. You could do a short RFI or you could do a short RFP.
Now those are basically the five ways. But the first two, asking your provider for data, that’s a bit problematic. I’m not sure the courts are going to like that if you stood up on the witness stand and said that.
And then anything that’s survey-based isn’t real data. It’s a survey. So those first two items are a bit problematic, which really leaves the industry with three options, solid benchmarking, a short RFI, or a custom RFP.
Jeffrey Snyder, Broadcast Retirement Network
So let’s start with RFI first. What do you think of that process?
Tom Kmak, Fiduciary Decisions
Yeah, I mean, it’s definitely something that’s used in the marketplace pretty often, and it provides some useful data for the right situation to give you a market check. But as the table on the screen shows, gold is basically gold standard, and the other parts are a little bit maybe not as solid. So the one that I get concerned the most with the RFI is that the fees are informal quotes.
They’re not really inked on a contract or something that’s actually paying. So I understand it’s a good market pulse, might be really great for smaller plans, but I don’t really think you’re going to see mid to larger plans use that type of service.
Jeffrey Snyder, Broadcast Retirement Network
And Tom, what about benchmarking in an RFP?
Tom Kmak, Fiduciary Decisions
Yeah, these are the two most popular. Yeah, thanks. These are the two most popular options in the marketplace, and deservedly so.
So on screen, you can see, are they both independent? Yes, solid benchmarking and a custom RFP. Is the data accurate?
Yes, you would get binding quotes in both and real data in both. The benchmark groups are different. Solid benchmarking has thousands of plans, whereas an RFP, you’re only going to get three to five quotes.
You get to see the quality of both service providers that they can talk about what they’re doing special for you. But then there’s a difference from services, value to the sponsor, value to the participants and extras. The RFP tends to be a little bit myopic.
It’s just looking at my plan and what services would you provide for my plan? It doesn’t say, well, do the services that my plan is receiving or the services I’m getting from my sponsor and my outcomes for my participants. How does that compare to others?
It’s a little bit more myopic. The fees, of course, you both get good fee quotes from that. The time for benchmarking is going to be less than an RFP.
And the cost for benchmarking is typically going to be less than RFP. But these are the two best ways for plan sponsors to help fulfill their fiduciary duties.
Jeffrey Snyder, Broadcast Retirement Network
So Tom, you talked about RFIs, you talked about RFPs, and you talked about benchmarking. So what’s the right tool at the right time?
Tom Kmak, Fiduciary Decisions
Yeah, this is probably the most pertinent question for the audience. I think the RFI is great for a current provider with a micro and small plan. You just want to check price to see if things look reasonable.
But once you get that price back, it might lead you to need to do benchmarking or maybe a bigger RFP. Solid benchmarking, our best practices are that you want to really do it every four years for plans in the $2 to $20 million range, what we call small plans. Probably every three years for plans with $20 to $100 million assets.
Every two years with plans $100 million to $500 million. Every year, if a plan is bigger than $500 million. Now why do we say that?
We’ve seen some court cases where the use of our report every single time has satisfied the judge’s ruling that, yeah, they did a nice process on determining fee reasonableness. Now the custom RFP is a little bit different. Like if you have a merger of two very similarly sized large plans, you probably want to go to RFP, go in each of the two providers and maybe a couple others that you think are right.
If you’re not happy with the quality of service, if you’re not happy with the services, the sponsors getting or their participants are getting. And finally, for larger plans, maybe you want to do the RFP every five years. You’re not going to do that every year.
You do benchmarking every year and then in the fifth year or so you do an RFP. I believe that process would be very sound from a fiduciary standpoint.
Jeffrey Snyder, Broadcast Retirement Network
Well, Tom, obviously the legal is important, but so is the practical. Really appreciate you coming on the program. And look, we look forward to having you back for future conversations.
Tom Kmak, Fiduciary Decisions
It’s my pleasure, Jeff. Thanks for taking the time.