Like an investment policy statement (IPS), a fee policy statement is designed to lay out guidelines for the plan sponsor to manage and document plan expenses. Also like an investment policy statements, fee policy statements are not required, however we believe it is a best practice and strongly encourage all of our clients to have one. The purpose of a fee policy statement is to outline the fee mechanics:
How fees are being charged
Who pays what fees (plan sponsor or participants)
What services are rendered for such fees
How often the fees are evaluated
A fee policy statement can be a simple form, where its sole purpose is to comply more fully with the fee disclosure requirements of the Employee Retirement Income Security Act (ERISA), or it can be an in depth statement that helps explain how the fees and revenue sharing are allocated between the plan, plan sponsor, and service provider. Fee policy statements can be included within other policies, like an IPS or as a standalone document.
The main advantage of having a fee policy statement is the information it brings to light for the plan committee. Documenting the fees in the statement and reviewing it at least annually continuously educates the committee on how the fee structure in the plan works. Knowing this information gives them the ability to keep track of the fees and make decisions that are in the best interest of the participants.
The second advantage would be satisfying the Department of Labor (DOL) if the plan is ever audited. The fee disclosure regulations, 408(b)(2) and 404(a)(5), do not specifically demand that plan sponsors have a fee policy statement, but they do require some sort of written guidelines to monitor fees. A fee policy statement goes beyond this, showing the DOL that as a fiduciary, you have working knowledge of the fee structure and a prudent process set in place for continuous monitoring and documenting of the fees.
Be aware there can be a litigation risk if statements are drafted improperly. Creating too strict or easily breached standards is one way a fiduciary could be subject to litigation or be constrained from fulfilling its fiduciary duty. So when drafting, it is best to give the fiduciary room to maneuver and state that the policies are just guidelines.
In summary, you can adopt a fee policy statement to help the plan committee manage and document plan fees and expenses. ProCourse considers adopting a fee policy statement a best practice for plan sponsors because it gives complete insight into the plan fee structure and shows regulatory oversight that the committee fully comprehends the impact of the fees in the plan.