An interview with Fiduciary Benchmarks' Tom Kmak

The Department of Labor has informed ERISA requirements on fee expenses by stating, "In choosing among potential service providers, as well as in monitoring and deciding whether to retain a service provider, the trustees must objectively assess the qualifications of the service provider, the quality of the work product, and the reasonableness of the fees charged in light of the services provided."

The difficulty of this fundamental fiduciary requirement has always been availability of information and a fiduciary's ability to disseminate information provided. This is where Fiduciary Benchmarks comes in. Fiduciary Benchmarks considers fees, services, support and success measures compiled from real plan data to assess a plan's fees reasonableness in comparison to comparable benchmark groups.

Fiduciary Benchmarks' CEO and co-founder Tom Kmak was kind enough to answer some questions for us regarding his company's approach and the state of fee disclosure and evaluation in general.

Fi360: Thank you for taking the time to answer our questions, Tom
Tom Kmak: Thank you for having me.  We respect and admire fi360 and the fiduciary and investment standards they are bringing to the marketplace.

Fi360: What kind of difference can fiduciaries make for the plans they manage by taking advantage of benchmarked data?
Tom Kmak: Well, there are really three benefits of our service.  The first is compliance with the law as you outline at the beginning of this interview.  Given the recent Caterpillar settlement for $16 million dollars, I cannot imagine any plan sponsor not having in place an annual process for reviewing their fees and services.  Secondly, it can save the plan money by making sure that the fees for all service providers are no more than reasonable.  Thirdly, benchmarking the fees AND services for a plan will make sure employees are getting the best plan possible thereby helping them achieve the best retirement outcomes possible.  Too often people associate benchmarking with just fees, but the value side of the equation is mathematically even more important.

Fi360: How or why has an environment existed for so long that made meaningful benchmarks so difficult to obtain?
Tom Kmak: It comes back to the fact that any proper benchmarking exercise considers both fees and value.  So, the reason benchmarking was difficult basically boils down to two reasons:

1. The fee schedules were so incredibly inconsistent from service provider to service provider.
2. There was no consensus on service standards.

This is why it took Fiduciary Benchmarks 9 months to finalize our first report. We had to make sure we could handle and normalize any fee schedule. Then, we had to define 8 critical value standards that could be compared against those fees to make sure the benchmarking exercise was comprehensive and informative.

Fi360: How cooperative have the service providers and record keepers been in providing data for your benchmarking?
Tom Kmak: At this time we have working protocols with 36 recordkeepers.  Some of them like Mass Mutual have been “very helpful.”  They are responsive to the requests of their advisors and they react quickly to make sure they enter the data we need via the FBi portal for our benchmarking reports. 

Then, there are firms like Fidelity that are “helpful.”  These firms may require a sponsor signature but they are happy to provide the documents to us or their clients.  We then enter that data into the FBi portal. 

Thirdly, we have service providers that are simply not offering any support whatsoever.  At this time, there are only 3 firms in this category and I would rather not name any names since I think they truly want to do the right thing for their clients.  And, while they all have a variety of reasons for not helping a client use our service, I do believe their stance will be short lived once the 408(b)(2) regulations are released.  Having said that, advisors are refusing to accept their reasons for not participating and we are working with these advisors to find the proper documents that have the data we need so their clients can get the benefits of our service.

Fi360: What challenges have you faced in developing meaningful benchmark peer groups for plan comparison?
Tom Kmak: At this time, we can benchmark any plan under $100 million dollars.  Our benchmark groups typically include 25-30 companies from approximately 10 different service providers.  Above $100 million dollars, it is taking us a little longer to get companies to participate for a variety of reasons.  We do have, however, a number of initiatives that are designed to solve this problem and we are confident we will issue reports in this segment in no more than 90 days.

Fi360: What practical issues have you encountered in sorting through the innumerable fee and expense names?
Tom Kmak: Well, the first thing we had to do was make sure we got the investment fees right since they account for 90% of the fees in our industry.  We had to be able to handle annuities, mutual funds, commingled funds, separate accounts and all of the revenue sharing mechanisms that may exist in those investments – things like 12b-1 fees, shareholder servicing fees and sub-transfer agency fees.  But, as we all know, there are also fees for services like participant recordkeeping or loans.  So, we looked at all of the major services a plan could be billed for and we provided a mechanism for those fees to be submitted to us as well.

Fi360: How would you define a successful plan? High participation? Low fees? Adequate choices?

Tom Kmak: This is actually an incredibly key question for our industry.  Exactly how do you define “winning?”  If you are a golfer, winning is pretty easy to understand – it is your score for the day.  But in the retirement industry, the answer is not as intuitive.

So, based on our experience and insight, “What is Winning” is going to come down to three issues:

1. Can participants retire how they want, when they want?
2. Is the plan sponsor being protected as the fiduciary for the plan?
3. Is the recordkeeping and administration for the plan running smoothly?

A service provider that can prove all three of these issues is definitely going to be a winner in this changing marketplace.

Fi360: Would new fee disclosure rules, such as DOL’s previously proposed 408(b)(2) regulations, be an adequate solution for plan fiduciaries to evaluate reasonableness of service provider arrangements? 
Tom Kmak: I absolutely applaud the DOL’s efforts on this important regulation and I think it will go a long way towards shedding light on the fee practices that exist in the industry.  But once you have made fees transparent by disclosing them, the next logical question any fiduciary is going to ask is: “Are these fees reasonable?”  Because fee reasonableness is the fundamental issue the DOL is trying to fix, not just disclosure and transparency.  And the only way to make sure fees are reasonable is by doing comparisons of fees and value.  In other words, a public mandate supplemented by private entities like Fiduciary Benchmarks will likely drive better results for all parties involved, including the best service providers.  After all, Edmunds.com did not hurt great car manufacturers like BMW.

Fi360: What more can legislators and regulators do as they consider regulatory reform to foster an environment of increased transparency?
Tom Kmak: I thought the 408(b)(2) regulation was really solid.  For example, 408(b)(2)(c)(1)(v) requires a service provider to disclose all information related to contract or arrangement and any related fees.  This provision ensures that service providers cannot ignore requests from firms like Fiduciary Benchmarks.  But, I think the two things we believe would provide additional useful comparisons is the unbundling of fees for bundled providers into a reasonable number of categories as well as some guidance on how to handle insurance company general or separate accounts.  Both of these can lead to the illusion of “free” recordkeeping services which we know is a bit misleading.  After all, nothing in life is truly fee.

Fiduciary Benchmarks recently announced their capability to benchmark 98% of all 401(k) plans, as well as the launching of a Retirement Readiness Index.  Tom Kmak was a speaker at the 2009 fi360 Conference. For more information on Fiduciary Benchmarks, visit www.fiduciarybenchmarks.com.