Pitfalls in Evaluating Retirement Plan Fees—And Avoiding Them

Benchmarking investment fees is an important function. In fact, it’s more than that—it’s critical to fulfilling fiduciary duty. But “essential” does not translate to “easy,” and there are some common pitfalls in performing that function. 

In the CAPTRUST blog entry “Understanding and Evaluating Retirement Plan Fees—Part Two: Benchmarking Investment Fees,” the authors—John Leissner, ARPS, CFS®, Senior Director and Head, Institutional Client Service and Operations, and Jennifer Doss, CRPS®, QKA, Senior Director and Defined Contribution Practice Leader, both of CAPTRUST—identify common problems with benchmarking fees and mistakes that can be made, and how to avoid them. 

Incomplete Benchmarking

It is possible to make the mistake of not benchmarking all the components of a retirement plan’s cost, and only benchmarking its total expense ratio, Doss and Leissner say. They warn that benchmark results can be misinterpreted if one only compares the total expense ratio without isolating net investment fees. Instead, they say, expense ratio minus revenue sharing—that is, fees built into the expense ratios of the plan investments—is what should be compared to other investment managers of the same asset class or category.

Benchmarking to the Wrong Group

When comparing the investment cost of funds in a lineup, Leissner and Doss say, only the net investment cost of each fund should be compared to a peer group that excludes funds with revenue sharing. However, they note, funds are often compared to peer groups without considering the net investment fees of the funds within that group. 

Funds also often are compared to a peer group that includes actively and passively managed funds, Doss and Leissner add, which risks having passively managed funds appearing less expensive than the category average, no matter how they compare to other passively managed investments in the same category. It also can result in a lower overall category average, which, in turn, makes it harder for actively managed funds in that category to appear reasonable.

Not Considering Investment Fees in Connection with Overall Investment Performance

ERISA requires a determination that plan fees for the services rendered are reasonable, Leissner and Doss write, and they caution that it is important to evaluate investment costs in relation to fund performance. In the case of a fund, they say, the service received can be considered in light of the fund’s performance relative to the standards the plan sponsor set. 

Doss and Leissner suggest that the lowest fee is not always the best value. They explain that a fund’s investment fees may be reasonable if, net of all fees, the fund is meeting performance standards the plan set. Further, they posit, this is the case even if its net investment fee is higher than the appropriate category average.