Tag Archives: fees

Employers helping former employees deal with rollover fees

Many defined contribution plan participants are incurring excessive fees when they roll over their account balances into their IRAs. Sponsors can help former employees maintain their savings by retaining the account balances within their qualified plans. In this article, Milliman consultant Doug Conkel discusses what plan sponsors are doing to help their former employees make better decisions with their plan balances.

Here is an excerpt:

Plan design thoughts

Like other transformations within the defined contribution (DC) market, the genesis of these changes is linked to creating a defined contribution plan with some attributes passed down from the “pension plan era.” Participants and sponsors alike are considering changes that shift the plan design discussion from retirement accumulation topics to the “de-accumulation” or payout phase. So what plan design changes are they making?

Partial lump-sum distributions. Many sponsors have modified their plans such that former participants can request a partial lump-sum distribution of their account balances. This enables former participants to satisfy a one-time expense while leaving a portion of their account balances in the plan.

Installments. Years ago, many sponsors simplified their distribution options by removing installments, based on the conclusion that “a participant can set up installments outside the plan (usually an IRA or annuity).” However, now some sponsors have come to realize the issues noted above with outside accounts and some participants are requesting in-plan installments. Some sponsors are again electing to liberalize the distribution options by allowing former participants to elect installment payments from the plan, which gives participants flexibility and allows them to keep their accounts in the plan….

Education and communication

Guidance on comparing fees. A plan that is run in an unbiased environment is able to provide guidance to participants to help them understand the fees they pay under the current plan provisions and how they might compare those fees to individual retail arrangements. The participant fee disclosure rules introduced a few years ago provide participants with the information they need to access their current plan’s total fees. The plan’s annual notice provides the investment expense ratios from which participants can calculate a weighted expense ratio using their personal account. Plus, using their quarterly statements, a participant can also determine the amount of direct expenses (if any) being deducted from the account. These two key pieces of information yield the total cost of a participant’s account within the qualified plan. If participants can obtain the same information about proposed IRAs or new employers’ retirement plans, they should be able to perform an apples-to-apples comparison of the fees. A best practice in the future would be to provide some guidance to former plan participants to assist them in making this comparison so they can then make informed decisions.

ERISA fee litigation: Is my plan at risk?

Skow-KevinSome plan sponsors may have wondered, upon reading about the recent $140 million settlement in the Haddock v. Nationwide case and the $1.3 billion settlement in the Lockheed Martin case, if their plans could be susceptible to an ERISA case over excessive fees. Here are a few things to consider in light of these recent settlement announcements:

Vendor transparency. Understanding fees should not be difficult—as long as you have a vendor or advisor that is transparent in the total revenue it expects to receive and as long as you know the expense of the investment products you have available for participants to invest in.

Service provider expenses. Think of anyone who may do work for you—an attorney, a contractor, a cleaning person. They bill you at an hourly rate. That comes to an annual amount. The same idea should be true within your retirement plan: You want to know who is working for you and what you are paying them, and you especially want to know whether it is a flat annual fee, a per-head fee, or a percentage of your plan’s assets. After all, you wouldn’t agree to hire attorneys and then give them access to your bank account to pay what they saw fit. And sometimes, with a better view of total revenue, it becomes evident that a “cheaper” provider may not mean a better provider when you are then able to evaluate the services and level of service you are receiving.

Investment expenses. Investment expenses must be included in your understanding of plan fees. Your investment products within the plan have fees that are required to be disclosed. For example: Fund A charges 76 bps and shares back 25 bps (or 0.76% with a 0.25% paid back to the plan). Do the math and apply their fee to the assets you have in their product—this is their projected revenue for the year—less any revenue sharing if they pay this.

Example Investment Expense Calculation:

Sample Investment Expense - Skow blog

Note, this fee is not deducted from your account balance—it is taken out of what would otherwise be your return. And if you lose money, you still pay this on top of it and so do all of your participants.

Revenue sharing. Revenue sharing should be easy to understand. It should be disclosed to you and should be going back to your plan in the form of an ERISA budget and used for the benefit of plan participants. We help our clients understand this by calculating the expenses for them and forecasting the fees and shared revenue, which may move the client to consider another share class that does not pay revenue sharing (or keeping a class that does because the net effect of the shared amount is financially advantageous). If revenue sharing exists, as it does in most plans to some extent, the discussion should then be about what to do with it. Should you allocate back to those participants in the plan that generated the revenue in the first place—or use it to pay hard-dollar expenses that are allowed under the plan? See my colleague’s recent series of articles with his insight on this issue.

Year-end balances. A note to the wise: Having expensive funds that generate large sums of revenue sharing to pay for these expenses in a given plan year—but that leave a balance carryover to the next plan year—is an issue that will come up in an audit (if it hasn’t already).

Total cost. After understanding the fees, plan sponsors should address how costs may be affected by participation, plan design, usage, or fund allocation.

Answers. Perhaps most importantly, if someone were to call you and ask what exactly he is paying for when participating in this plan, you would have an answer that could help him make an important decision when it becomes time to retire.

For example: In the chart above, this $30 million plan has a weighted expense ratio of 54 bps. Let’s assume the total administration expense (all service providers: recordkeeper, trust company, advisor, auditor) is $80,000 (or ~27 bps) and those fees are paid for on a pro rata basis by all plan participants.

This plan’s total annual expense would be estimated as follows:

Investment expense: .54%
+ Vendor expenses: .27%
(-) Revenue sharing: (.22%)
Total: .59%

The size of the recent settlements lends perspective on how big of an issue fees can become for a plan sponsor. Sponsors that attend to the principles outlined in this blog—and work with their vendors to build transparency around these issues—can avoid becoming a statistic.

The Supreme Court, Tibble, fees, and the statute of limitations

Smith-SuzanneEarlier this month, the U. S. Supreme Court decided that it will review a case relating to retirement plan fees. Although it is a case about fees, the issue before the Supreme Court is really about ERISA’s six-year statute of limitations.

Background about the case. Plan participant Glenn Tibble brought a lawsuit against his employer, Edison International, and the company’s benefits and investment committees as fiduciaries and administrators of his defined contribution (DC) plan. Tibble claims the plan fiduciaries managed the plan imprudently by selecting retail mutual funds as retirement plan investments when institutional shares were available at a much lower cost to participants.

The lower courts found that the fiduciaries were imprudent in selecting retail-class shares and failing to investigate alternative institutional-class mutual funds.

The problem for Tibble is that some of the retail-class funds were added to the retirement plan more than six years before Tibble filed the lawsuit.

The courts have held that although the fiduciaries were imprudent with the selection of the retail-class shares, Tibble’s claim with respect to funds selected more than six years before the lawsuit is barred by ERISA’s six-year statute of limitations.

Current issue for the Supreme Court review. Now the Supreme Court has agreed to review the statute of limitations issue.

Tibble’s argument, which is supported by the U.S. Department of Labor, is that there is a continuing duty to monitor the plan investments. As a result, Tibble thinks his claim should not be time-barred under the theory that there is a restart of the six-year period with the ongoing failure to monitor the plan’s investments. This is a frightening thought for employers!

Prior court decisions have sided with the fiduciaries and found that the six-year period runs from the initial selection of the investment. While there is a duty to monitor the plan’s investments, the courts have been reluctant to permit a new limitations period for a continuing violation. The Ninth Circuit said it would lead to an “unworkable result” where present fiduciaries could be liable for decisions made by their predecessors decades before.

So what are the takeaways for plan fiduciaries? On the fee issues, if you are selecting retail type mutual funds, you need to consider alternative institutional-class mutual funds and document your decision.

With respect to the statute of limitations, we should have the Supreme Court decision by the end of June 2015. For plan fiduciaries, the decision will be an important ruling on the meaning of ERISA’s six-year statute of limitations and the future liability for plan sponsors.

Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?

Conkel-DouglasThe U.S. Supreme Court has agreed to rule on the Tibble vs. Edison case, the first case in front of the Supreme Court dealing with excess fees within a qualified defined contribution (DC) plan, e.g., a 401(k) plan. In this case the plaintiff contends there was a fiduciary breach of duty by Edison because the plan continued to use retail share class funds when lower-cost share classes became available to the plan as it grew. However, the focus of the ruling may not focus on the excess fee component but more on the six-year statute of limitations under ERISA (the U.S. law that regulates qualified retirement plans and fiduciary responsibilities). The statute of limitation under ERISA is designed to prevent fiduciaries from never-ending risks arising from historical decisions. Congress specifically added this limitation to try to minimize the burden of a 401(k) plan to plan sponsors. For this reason, the scope of the ruling may be limited to the statute of limitations rather than specifics on the fee issue. However, this ruling will be significant in light of the $4.2 trillion in 401(k) plan retirement assets.

Ultimately, the Supreme Court’s ruling and comments could have a large impact on future litigation concerning participant grievance against plan sponsors—we will have to wait and see. Regardless of the ruling, this increased attention will hopefully promote more education and development of best practices when it comes to plan sponsors truly understanding their fee arrangements within their qualified plans. As an active relationship manager ensuring that my clients completely understand their “total” fee structure, there has been a focused effort on my part toward that end the last several years. I have written a couple of white papers discussing elements of qualified plan fees, which often are overlooked or not discussed in detail at the fiduciary/advisor/provider level:

Fees: What everyone is NOT talking about!

Fees: What no one is talking about, round 2

One of the fee elements I discuss in detail is the administrative fees (revenue sharing) embedded in the plan’s investment options. It often feels as if sponsors focus on implicit administration fees when usually 70% or more of the plan’s total cost comes from the expense ratios of the plan’s investment options. One important best practice is to ensure that any revenue sharing embedded in a fund’s expense ratio is used to benefit the participants invested in that fund (not at the plan level but to benefit the participants who actually pay that revenue-sharing amount via the expense ratio). This is referred to as “fee-leveling” and while it is becoming a best practice there are still a large number of sponsors who don’t understand the issue and simply don’t know the solutions.

Assuming that a plan levels fees by giving the participants in a fund the benefit of that fund’s revenue sharing, then once an investment option is chosen for a plan’s fund lineup selecting the share class of that fund becomes an easy choice. The sponsor simply needs to select the share class that provides the lowest net cost to the participant. In the example below, assume that a plan sponsor levels fees by taking any revenue sharing paid by an investment option and crediting that back to the participants in that fund as a revenue-sharing expense reimbursement (a credit).

Figure 1: Fund A, Various Share Classes

Expense Ratio Revenue Sharing Net Cost to Participant
Share Class A 0.75% 0.30% 0.45%
Share Class I 0.50% 0% 0.50%

In the example above, for this plan at its current provider, the lowest net cost to participants (once the revenue sharing is allocated back to participants in this fund) would be the Share Class A. This is not always the result, depending on the fund family and share classes. Sometimes, there is no difference in net cost so the conclusion would be to go with the zero revenue-sharing class so the plan doesn’t have to do a revenue-sharing credit allocation.

As this case progresses we will post more comments and updates, but, for now, I encourage sponsors to study up on their plan’s fee arrangements, fee-leveling, and other best practices within the industry. Sponsors should not rely too much on their current providers or advisors if some of the topics discussed above have never been mentioned in a retirement committee meeting, as they might lack the insight required to do a complete evaluation.

Retirement plans and fees: Get some satisfaction

Guanella-Jay-EThe balance between value and expense is often a large part of our daily considerations. As a consumer, when we look at the cost of a jar of peanut butter, we consider the quality of the product and the opportunity for satisfaction. The same rationale is true with retirement plans, though satisfaction as it relates to value in a retirement plan product is more difficult to define. At a base level, it could be as simple as answering the question, “Are the participants in the plan satisfied with their projected retirements?” At termination of employment, why does a participant feel the need to move their assets out of the retirement plan that they had previously relied on for several years?

With the new fee disclosure requirements, most plan sponsors are well aware of the costs involved to maintain their plans, including administration and trust/custody fees. These expenses are clearly defined in communications to the plan sponsor and participants. Also included is a listing of fund returns along with operating expense ratios (OERs) for the investments. The OER is the expense charged by the investment to the participant and can vary significantly, not only from fund family to fund family but by similar investments as well.

Savvy investors understand the important role of OER and how different share classes of the same investment can yield different results. Participants in a retirement plan are more likely to experience lower expense ratios than if they invest by themselves in an individual retirement account (IRA). To illustrate the expense, if a plan participant invests $10,000 in a fund with an expense ratio of 0.46%, the cost per year is $46. That same investment at a retail IRA level could have an expense ratio as high as 0.85% or $85 per year. That extra 0.39% in expense directly reduces the return on investment (or satisfaction) for participants. Which raises the question, why are participants so eager to leave the employer’s retirement plan for an IRA?

Perhaps having one investment advisor watch over your all of your retirement funds can be comforting to participants. The number of investment options increase when moving from a retirement plan to a retail product. And the termination of employment can lead to a feeling of separation with the company and retirement plan.

Providing participants detailed information on their post-employment options can help them make informed decisions to maintain retirement satisfaction. It is important for participants to know they may not be required to move their money out of their retirement plans. They may want to consider the expense and features of the plan compared to other investment vehicles and decide where they see the most value for their retirement dollars to maintain that level of satisfaction.

Top 10 Milliman blogs items for 2013

Milliman publishes blog content addressing complex issues with broad social importance. Our actuaries and consultants offer their perspective on healthcare, retirement plans, regulatory compliance, and more. The list below highlights Milliman’s top 10 blogs in 2013 based on total pageviews:

10. In their blog “Five keys to writing a successful qualified health plan application,” Maureen Tressel Lewis and Bonnie Benson highlight several best practices insurers should consider when submitting a qualified health plan application to the Health Insurance Marketplace.

9. “Understanding ACA’s subsidies and their effect on premiums” offers perspective into the relationship between healthcare premiums and federal subsidies for low-income individuals.

8. Funding for future Consumer Operated and Oriented Plans(CO-OPs) was eliminated as a result of the fiscal deal that was signed in December 2012. Tom Snook takes a look at how the deal affects CO-OPs in his blog “CO-OPs: An endangered species?

7. Robert Schmidt discusses why the methodology used to determine COBRA premium rates is essential in his blog “The growing importance of COBRA rate methodologies.”

6. A second blog by Maureen Tressel Lewis and Mary Schlaphoff entitled “Five critical success factors for participation in exchange markets” highlights tactics that insurers offering qualified health plans may benefit from implementing.

5. “Pension plans: Key dates and deadlines for 2013” offers Milliman’s three retirement plan calendars (defined benefit, defined contribution, and multiemployer) with key administrative dates and deadlines throughout the year.

4. In her blog “Fee leveling in DC plans: Disclosure is just the beginning,” Genny Sedgwick explains how investment expenses and revenue sharing affect the fees paid by defined contribution plan participants.

3. Maureen Tressel Lewis and Mary Schlaphoff’s blog “Five common gaps for exchange readiness” describes items issuers of qualified health plans have to resolve before their plans can be sold on the Health Insurance Marketplace.

2. In the lead up to implementation of the Patient Protection and Affordable Care Act (ACA), debate often centered on how the law would affect healthcare premiums. Our “ACA premium rate reading list” offers perspective on how rates may be affected.

1. In his blog “Retiring early under ACA: An unexpected outcome for employers?,” Jeff Bradley discusses the impact that the ACA could have on both early retirees and plan sponsors.

This article was first publish at Milliman Insight.

Revenue sharing creates disparities in retirement plan fee allocations

In his paper “Fees: What no one is talking about, round 2,” Milliman’s Doug Conkel revisits the question of “what is fair?” concerning retirement plan fees paid by participants. The paper focuses on the inequalities that revenue sharing produces in retirement plan fees paid at the participant level. Here is an excerpt:

At this point, I think it is blatantly clear that revenue sharing creates disparity in fees paid across participants. But how much disparity truly exists? From time to time, I hear sponsors comment that most of their funds have revenue sharing and the rates are pretty similar, so each participant should be paying a similar fee. To test this assumption, I pulled participant data across five industry segments and calculated the participant-level revenue sharing by multiplying each participant’s fund balance by the revenue sharing percentage for that fund. I then summed the total revenue sharing generated across all funds for that participant and divided the total revenue sharing amount by the total account balance for an individual revenue sharing percentage. Figure 2 illustrates the graphical and tabular results of my findings.


Conkel’s first article, “Fees: What everyone is NOT talking about!,” offers solutions for keeping fees at the participant and fund levels fair.

Balancing retirement plan fee allocations

How do retirement plan sponsors ensure that the actual fees paid by each plan participant are fair when compared to other participants within the plan? In his article “Fees: What everyone is NOT talking about!”, Doug Conkel discusses current practices that create inequitable fee allocations.

Here is an excerpt:

The existing models, which simply use the revenue sharing from the funds to pay for most—if not all—of the administration and other services, provide an easy option on a number of levels.

• It is easy for plan sponsors to understand: There are no invoices to review, typically no price increases as long as assets continue to grow, and no outside explicit (visible) fees to allocate to participants—all making it easy for plan sponsors to overlook (a familiar byproduct of the infamous “if it ain’t broke, don’t fix it” school of thought).
• For participants, it’s easy in part because the new participant fee regulations did not mandate that the revenue sharing portion of the expense ratio be disclosed so participants (and frankly sponsors also) could easily tell how much of their investment fees are being collected and used for services outside the fund management itself. It is easy, since the fees are implicit, embedded in the expense ratios, such that most participants really don’t understand how much they are truly paying for non-investment services.

Just because it’s easy doesn’t make it right. If we know that the individual fee allocations are not equitable, why isn’t everyone trying to solve this issue? Ultimately, the market will drive solutions (we are starting to see some now) but, in the meantime, many providers and sponsors are sticking with the old model. Why? Because the old model is easy and part of an established structure, it’s off the participant and sponsor radar, and solutions for fixing the fee inequities are more complex to administer and communicate to participants. Nevertheless, there are ways plan sponsors and practitioners in the industry can fix the inequitable allocation of fees. Sponsors and practitioners alike need to do right by the participants even if the ultimate solution is not as easy or completely understood by all participants.

Before we move on, I want to make one point. The current practice discussed above is an allowable option for assessing or offsetting appropriate fees from qualified plans. There is no clear guidance from the DOL or IRS which would mandate that sponsors have to “level or normalize” fees paid via revenue sharing such that all participants pay a uniform rate.

Doug also offers solutions for keeping fees at the participant and fund levels fair.

There are solutions to this issue which have been embraced by some plan sponsors and engineered by independent advisers and recordkeepers. The solutions include:

• Using all institutional funds (no revenue sharing). Due to fund investment minimums, usually only plans with larger asset bases can use this option.
• When revenue sharing is utilized (some good funds worth having in a plan may still only have a revenue sharing class), it is allocated back to the participants invested in that fund.
• Net the revenue sharing with a fixed fee on a fund-by-fund basis. (If the revenue sharing collected exceeds the fixed fee, then the excess is allocated to participants invested in that fund.)

Because of the disparity of revenue sharing, the solutions to normalize the fees across all participants and investments are described as “more complicated” and “harder to communicate to employees.” This is true, but as previously stated, just because it’s easy doesn’t make it right, which also means that just because it’s more complicated doesn’t make it wrong. I would speculate that once sponsors learn the facts, many would agree that the current revenue sharing models are not fair to all participants and some type of transition or solution is required.

Fee disclosure regulations prompt changes in plan sponsor approach

This PlanSponsor article quotes Genny Sedgwick discussing how fee disclosure regulations have affected changes in the way businesses approach fee transparency.

Here is an excerpt:

Even for companies that had full transparency before fee disclosure regulations, 408(b)(2) and 404(a)(5) still prompted change in their businesses.

Genny Sedgwick, principal at Milliman, said during a panel at the 2013 PLANSPONSOR National Conference that although her company’s entire book of business already had fee transparency, fee disclosure regulations spurred more education initiatives. In educating plan sponsor committees about fee disclosure, the outcome included investment changes. “There were a lot of changes in the fund menu,” Sedgwick said.

More index funds were also added to plan menus, she added, anticipating that participants would ask for lower-cost investments following fee disclosure.

Overall, Sedgwick said Milliman welcomed fee disclosure because it leveled the playing field by requiring more transparency across the industry.

In this blog, Genny explains the relationship between defined contribution plan fees and investment expenses. She also gives perspective on the concept of revenue sharing.

For more perspective from Genny, click here.

Fee leveling in DC plans: Disclosure is just the beginning

This blog summarizes a presentation given by Genny Sedgwick at the Mid-Sized Retirement & Healthcare Plan Management Conference in San Francisco.

We’ve talked a lot about fees in defined contribution (DC) retirement plans lately: the disclosure regulations effective in 2012 have caused quite a stir, and for good reason. For plan fiduciaries, ensuring that retirement plan fees are reasonable and fair is a fiduciary duty, and understanding plan fees can have a significant impact on retirement savings for participants.

For example, if a participant’s retirement investments or account is overpriced by one-quarter of 1% (25 basis points), and the participant has $5,250 in total contributions annually for 40 years, then that participant will have overpaid $40,056 in fees!

But simply knowing the base amount or formula stated by the recordkeeper is often not sufficient to truly understand the impact of fees in a retirement plan. It’s also essential for plan sponsors to consider the different types of fees that occur in retirement plans: plan-level service fees, participant-level service fees, and investment fees. These fees interplay in ways that can have dramatically differing effects from participant to participant.

In order to understand retirement plan fees, it’s important to understand investment expenses and the concept of revenue sharing. Each investment option has an expense ratio, which may contain two major fee components: an investment management fee that varies based on the attributes of the fund or its manager, and a shareholder service fee, which is often paid indirectly to the plan’s service provider(s) in a process called revenue sharing. Expense ratios can vary substantially from fund to fund within a plan, so participants pay different amounts of investment expenses based on their allocations among those funds. Revenue sharing further complicates the matter because not all investment options have a shareholder service component, and those that do have different rates and policies.

Revenue sharing can be normalized among participant accounts in the plan through a process called fee leveling, wherein revenue sharing is allocated back to participant accounts on a per capita or pro rata basis, or back to the participants who held the funds that generated the revenue sharing. However, not all recordkeepers can administer all of these options.

Another issue to consider is who should pay the plan fees that exceed the amount of revenue sharing generated by the plan. Some employers choose to pay these fees, while some assess them to participant accounts, in which case they must decide whether to allocate those “hard” costs pro rata or per capita. Pro rata cost allocations protect smaller account balances, while per capita allocations protect larger account balances.

What’s right for your plan? As the plan sponsor, it’s your choice, but given the implications for fiduciaries and the impact on the retirement readiness of participants, it’s important to understand the options, consider what’s best for your plan, and document your decision.