Tag Archives: fee disclosure

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.

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.

Milliman sponsors the Mid-Sized Retirement & Healthcare Plan Management Conference in San Francisco

I am pleased to announce that Milliman is again sponsoring the Mid-Sized Retirement & Healthcare Plan Management Conference, March 17- 20, 2013, at the Fairmont Hotel in San Francisco, California. This is our third year sponsoring the San Francisco conference, and we are excited to participate again in this educational event for employee benefit plan professionals. The small scale and comfortable setting of the conference create an atmosphere of open-minded discussion and collaborative problem solving, where plan sponsors can share ideas with their peers and gain access to insight from industry leaders.

The conference will address both healthcare and retirement plan topics, with sessions designed to appeal to HR and benefits representatives of small and mid-sized companies, as well as CFOs and other company officers with plan fiduciary or risk management responsibilities.

This year’s program features an extensive agenda of more than 45 workshops that will guide attendees through current issues facing employee benefit plans. In the healthcare track, the conference workshops will cover strategies to prepare for the full implementation of the Patient Protection and Affordable Care Act in 2014; analysis of how a company’s benefit plans can create the right benefit mix to fit the unique needs of each organization; and more. On the retirement side, the workshops include strategies to improve retirement readiness, analysis of investment platform options and considerations (target date funds, stable value options, and annuitized income strategies), and more, including these two by Milliman:

• Reducing Retirement Plan Risk in a Volatile Market, presented by Steve Hastings and Mahrukh Mavalvala. This session will cover types of risk inherent in defined benefit pension plans and approaches to mitigate them, including plan design, asset allocation, and settlement strategies. The pros and cons of each risk mitigation strategy will be discussed.

• Fee Leveling in DC Plans: Disclosure is Just the Beginning, presented by Genny Sedgwick and Nate Sherman. In the context of heightened disclosures and scrutiny of fees and revenue sharing in participant-directed retirement plans, how well do plan sponsors (and participants) understand the allocations of fees in their retirement plans? This session will discuss various fee allocation strategies, the incorporation of revenue sharing in a plan’s fee assessment methodology (fee leveling), and the fiduciary considerations therein.

Plenty of disclosure; not enough information

As the last wave of new fee disclosures is readied for inclusion with quarterly statements this month, the big question remains: What impact, if any, will the barrage of fee disclosures have on the retirement plan marketplace in general, and, more specifically, on retirement readiness for participants?

While the pricing landscape for retirement plan recordkeepers is, in many cases, still a confusing combination of basis points, rebates, formulas, and wraps, we have seen a marked uptick in sales activity as an increasing number of plan sponsors endeavor to measure the reasonableness of their vendors’ fees, services, and value. The service provider disclosure requirements of 408(b)2 should have a positive effect on the retirement plan marketplace, allowing sponsors a better understanding of the underlying fee components and fee assessment methodologies, and making them better prepared to compare their fees with market rates. Increasingly prevalent and accurate benchmarks should lead to lower and more equitable fees, lower-cost investment options, and improved retirement savings for many participants.

But this month, the focus is on the 404(a)5 disclosures for participants. Yes, it’s important that participants understand that their retirement plans are not free, and that their investment decisions affect the expenses charged to their retirement savings accounts. But will that really be accomplished by sending information that vast segments of the participant population won’t properly study—and when even those who do will not have any context to gauge the “new” fees that appear therein? Only a third of participants spent more than five minutes looking at the annual disclosures they received last quarter, and only a fraction of a percent actually called to ask questions of their plan sponsors and service providers. How many participants will notice the additional fee detail on their statements this quarter? And for those who do, will they have the knowledge to appropriately interpret the information they’ve been provided?

Recordkeepers and plan sponsors should not rely on participants to process these disclosures into actionable decisions on their own. The required disclosures, while a step in the right direction, are far from sufficient. If we want participants to understand and take appropriate action in their accounts, service providers and plan sponsors need to proactively engage with participants, using communication strategies targeted to each specific population segment that will deliver the appropriate tools for effective decision making.

What to look for in 2012: Defined contribution plans

Defined contribution (DC) plans
July 1, 2012, is a significant date for defined contribution (DC) plan sponsors, including persons who have legal responsibility for managing someone else’s money, trustees, and investment committee members. By that date, plan sponsors should have received information from all plan service providers disclosing their status as it relates to the plan, such as an ERISA fiduciary and/or registered investment advisor, their estimated fees, how they are compensated, and the services they provide. The new U.S. Department of Labor (DOL) regulations are intended to improve fee disclosure to regulators, plan sponsors, and plan participants. Plan sponsors have a fiduciary responsibility to review, for reasonableness, the compensation of their service providers that is paid from plan assets both directly and indirectly. However, in our experience, some plan sponsors are not aware of the total amount of fees paid from the plan or how they are calculated.

Many plan fiduciaries may not be aware that it is both a fiduciary breach and prohibited transaction to allow the plan to pay more than what is considered reasonable expenses. In practice, how does a fiduciary determine if plan fees are reasonable? If you’ve taken your plan out to bid within the last three years, you should have current market information and documentation for your due diligence files to support the fees you are paying, or have taken action by going back to your service provider(s) to negotiate lower fees on behalf of plan participants. In lieu of going out to bid, there are other options available: for example, you can benchmark your plan. The DOL has developed fee disclosure worksheets that can be found on their website at: DOL Publications “Understanding Retirement Plan Fees and Expenses “ and “Cost Disclosure Sheet.”

There is nothing in the regulations to imply a plan must have the lowest fees, just that the plan’s fees be reasonable and commensurate with the services provided. Qualitative differences in services may impact fees. For example, quality of service varies with respect to the range of planning and guidance tools available to participants, which may drive up fees. We strongly encourage plan sponsors to develop a diligent process to evaluate fees on an ongoing basis and to document their processes. Costly litigation can be avoided by implementing a sound process, which shows that you have taken reasonable steps to fulfill your plan fiduciary responsibilities.