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.