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Posts Tagged ‘fees’

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

October 16th, 2014 No comments

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

March 19th, 2014 No comments

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

December 19th, 2013 No comments

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

December 9th, 2013 No comments

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.

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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

July 17th, 2013 No comments

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

June 10th, 2013 No comments

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

April 3rd, 2013 No comments

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.

Interim guidance on electronic disclosure of retirement plan fees

October 13th, 2011 No comments

Certain plan sponsors and administrators are permitted to use electronic media to furnish information about the plan’s fees to participants. The Department of Labor has issued guidance on such communication. This Client Action Bulletin digs into the details.

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DOL further extends applicability date of fee disclosure rules

July 15th, 2011 No comments

The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) issued a final rule on July 13 that further extends the applicability dates of the interim final rule on fiduciary-level fee disclosures and the final rule on participant-level fee disclosures. Both of these regulations were published in 2010, but on June 1, EBSA published a proposal to extend the compliance dates to give employers and other affected entities more time to comply with the new requirements.

The fiduciary-level fee disclosure requirements apply to service providers of ERISA-covered defined benefit (DB) or defined contribution (DC) retirement plans; the participant-level disclosures apply to ERISA-covered 401(k) and other individual account plans that give participants the right to direct their investments.

Under the newly released final rule, the effective dates are:

Type of Fee Disclosure

Final Rule’s Extended Applicability Date Prior Proposed Rule’s Extended Applicability Date
Fiduciary-Level (under ERISA §408(b)(2)) April 1, 2012 January 1, 2012
Participant-Level (under ERISA §404(a)(5)) No later than May 31, 2012, for initial disclosures by calendar-year plans No later than April 30, 2012, for initial disclosures by calendar-year plans

Other disclosures, such as quarterly statements of fees/expenses actually deducted from participants’ accounts, must be provided to plan participants by August 14, 2012, which is the 45th day after the end of the second quarter (April-June) in which the initial disclosure was required.

EBSA intends to publish a final fiduciary-level fee disclosure regulation “before the end of the year” in an effort to serve the “best interest of responsible plan fiduciaries, plan administrators, and plan participants and beneficiaries.” The agency also is expected to issue updated guidance on the use of electronic media to provide participant-level disclosures.

EBSA’s new final rule is available here.

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DOL proposes to extend fee disclosure applicability dates

June 1st, 2011 No comments

The Department of Labor’s Employee Benefits Security Administration (EBSA) on May 31 issued a notice proposing to extend and align the applicability dates for both the interim final rule on fiduciary-level fee disclosure (ERISA Section 408(b)(2)) and the final rule for participant-level fee disclosure.

Read more…

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