Tag Archives: fees

Is there a fee for this?

Let’s face it, project fee discussions are never fun. But they are a critical part of doing business, both from a retirement plan management perspective and in building a strong overall partnership between you and your vendors. A consistent approach to fee discussions can build credibility on both sides now and in the future as needed projects arise.

The first key ingredient to a fee discussion or proposal is transparency. Being open and direct about fees helps to avoid the negative perception that can arise with surprises and confusion about why a fee is being charged or how much a request will actually cost. Removing uncertainty and proactively addressing fee questions will be an important step in building trust between you and your vendors. Your vendor should communicate early and often, allowing ample time for discussion, proposal review, and follow-up questions.

The second key ingredient is making sure your vendor is communicating with the proper stakeholders within your organization. Your vendors often work with many different contacts within your organization, and ensuring that the key decision makers are not only in the loop but are the appropriate contacts will prevent vendors discussing the proposal with multiple partners before getting to the right person who can provide approvals for the work—that person may not always be you.

The third key ingredient is for your vendor to work closely with its own internal business partners to ensure that what is being proposed is appropriate from an effort perspective, and that a high-quality product is delivered to satisfy the specific need. Chances are, your vendor contact may not be the expert in all the necessary detail needed for a successful effort. It’s important for vendor contacts to properly coordinate with their own internal resources to obtain what is needed to estimate the work and associated costs. This will go a long way toward efficiently getting the work done at the right cost.

A structured proposal should always be provided regardless of the nature of the project on the table. The proposal should be clear and concise, getting to the point quickly on what is to be delivered and the costs around it. A similar approach and structure each time allows you as the client to know what is coming, and to build a level of comfort with your vendor to avoid confusion and uncertainty. The main topics covered in a structured proposal should always include: what is being asked, what is being delivered, and a clear overview of the cost (hours worked, cost per hour, or cost per work item). Finally, it is equally critical to state what is not being covered by a proposal. This helps to set the scope and boundaries around the work product, protecting both you and your vendor from surprises during the course of the work.

Even with a smooth start to a fee discussion, things can go wrong. The scope of the project can change or timelines may require modification. In these cases, it is critical for your vendor to keep you informed through frequent and scheduled updates. This should be done at every stage of the project, allowing you and your internal business partners to digest and respond in a timely fashion as changes come up.

The positive Impact of consistently following this approach accomplishes several important goals. First, it ensures all parties will be clear about the scope of the work and the cost. Second, the credibility built through developing a structured process reduces future work and questions surrounding projects and proposals. Clearly said, you know what is coming, you understand the approach, you have the relevant details, and you can mitigate time spent asking questions around costs and the services to be delivered. Finally, and perhaps most importantly, this goes a long way in building confidence in your business partners and believing that they can be trusted to deliver fair fees and a high-quality work product.

IRS reduces fees for qualified retirement plan sponsors to correct errors

For 2018, the Internal Revenue Service (IRS) has significantly lowered the fees that most tax-qualified retirement plan sponsors must pay to correct errors under the Employee Plans Compliance Resolution System’s Voluntary Correction Program (VCP). The VCP’s new, lowered user fees are provided in Revenue Procedure 2018-4, and are based on plan assets and capped at $3,500. Previously, the fees were based on the number of plan participants and capped at $15,000. In addition, the fee covers all eligible errors and a single submission may cover multiple errors, but the reduced fees for streamlined filings (e.g., to correct minor errors such as loan or minimum distribution failures) no longer are available.

Small plans with 50 or fewer participants will experience an increase in costs, as previously the VCP user fees were $500 for 20 or fewer participants and $750 for 21 to 50 participants.

The fees effective for VCP applications mailed to the IRS on or after January 2, 2018, are:

Plan Assets Fees for 2018
$0 to $500,000 $1,500
Over $500,000 to $10,000,000 $3,000
Over $10,000,000 $3,500

The most recently filed Form 5500-series return (Annual Return/Report of Employee Benefit Plan) is used to determine a plan’s net assets. Special rules apply to plan sponsors that are not required to file Form 5500, as well as for very small plans (e.g., SEPs, SARSEPs, SIMPLE IRAs). The new fee schedule does not apply to group VCP submissions, nor to “orphan” plans or 457(b) tax-deferred plans.

Reporting fees on Form 8951
The IRS is currently revising Form 8951, User Fee for Application for Voluntary Correction Program (VCP). Until a revised form is available, the IRS advises plan sponsors to:

• Continue using the current Form 8951 (rev. September 2016), ignoring the information on the form that suggests VCP fees are determined based upon the number of plan participants.
• Not check boxes on Lines 8(a) through 8(c) because they no longer apply.
• Attach a check for the fee amount specified in Rev. Proc. 2018-4, Appendix A.09.

For information about the new VCP fees and for assistance with assessing whether to proceed with VCP or other, possibly more appropriate correction programs, please contact your Milliman consultant.

Final fiduciary rules: Frustrations and the unknown

Tedesco-KaraOn June 8, 2016, the U.S. Department of Labor (DOL) final fiduciary rules became effective, but these new rules are not actually applicable until April 10, 2017. The final rules outline what advisers, financial institutions, and employers need to do to adhere to them. Daunting? Yes. Impossible? Maybe, but some believe the fiduciary rules have been a long time coming. The new rules require advisers and financial institutions to comply with and uphold the fiduciary standards surrounding ERISA when advising clients for a fee. This is significant, as it has the potential to impact how some advisers help their clients with retirement planning. Some advisers may decide to stop helping.

As participants become more and more responsible for their own retirement savings, employers are finding they need to turn to their retirement plan experts for help. A plan adviser who gives fiduciary advice receives compensation for the recommendation he or she makes, and usually the recommendation is based on the specific needs of the participant. The advice is given so that an action will be taken. The final rules clearly state this expert is a fiduciary and the recommendation made has to be in the best interest of the participant and not the pocketbook of the employer and or adviser.

Why is this so important? Because millions of participant dollars have been rolled into IRAs that have high fees and expenses associated with them. Participants don’t understand the fees, they don’t understand their investments, and often they lack the proper tools to help them make educated decisions. It bears asking the question, should an adviser make a recommendation to roll or transfer account balances to another plan or IRA, when a participant might be better off staying put? The answer could be yes, and employers may find that terminated employees are staying with them because it is a better financial decision.

How do advisers and employers feel about this? Many advisers are frustrated they will have to comply with the best interest contract exemption. It has several requirements, but it means advisers may need to modify or fine tune their current practices to satisfy the rules. Plan sponsors will have to take another look at their advisers and service providers and understand their fiduciary responsibilities. It’s important they confirm that any rollover assistance is administrative in nature and cannot be perceived as advice from non-fiduciary human resources (HR) staff or service providers. However, plan sponsors can now feel good knowing that the general education they offer to participants about plans and investments is acceptable; it does not mean they are providing investment advice or taking on additional fiduciary responsibility.

With all of this said, could the election results change, delay, or repeal the final fiduciary rules? There is speculation this could happen, which makes the financial services industry happy, but for those pushing for reform, very unhappy.

Goodbye rollovers, hello “stay-overs”

Moen-AlexNo surprise here—Baby Boomers are retiring. But as they retire, there is a new trend in town, the “stay-over.” The stay-over approach represents a shift in thinking about how employees will handle their retirement savings investments. Instead of rolling money out of employer plans into IRAs, the stay-over approach encourages retirees to keep their money in their current company-sponsored plans.

Plan sponsors, and their plan advisors, are now competing to keep retirees’ money in employer plans. The reason? As that extremely large workforce exits, sponsors are worried about their ability to negotiate fees with their outside fund managers and maintain lower overall fees for plan participants. Plan sponsors are now forced to weigh traditional concerns related to administration and compliance costs against fee negotiations. A recent Wall Street Journal article says, “Workers pay about 0.45% of assets in fees to outside money managers when they remain in the firm’s 401(k) plan; by comparison, experts estimate they would pay fees of more than 1.5% in IRAs.” Increased plan assets create economies of scale, which in turn reduces the level of fees for all participants in the plan. This movement is also in line with the overarching goal of encouraging retirees’ savings, focusing on keeping money in the plan, and educating employees about their options. Baby Boomer assets in defined contribution/401(k) plans currently total $4 trillion dollars, according to the same Wall Street Journal article, and 2013 was the first year that plan level withdrawals exceeded contributions. This rollover versus stay-over debate is just beginning to launch.

Employees benefit by keeping their balances in the plan as well. Fees paid by participants have a huge impact on the growth of investments over time, thus participants can benefit from the lower fees. Retirees face pressure from outside financial advisors who will try to convince them that keeping money in employer plans adds a layer of difficulty to investment changes and accessing funds. On the contrary, though, investing can be easier for ex-employees to manage because they are more familiar with the fund offerings and fewer choices are less overwhelming. Usually plan investment options are selected and monitored by independent investment advisors who work with the plan fiduciaries—this translates into professional unbiased advisory services, which benefits all participants. A plan feature to consider, which will aid and encourage workers to keep money in the plan, is ad hoc withdrawals for retirees, allowing participants to access their accounts the same way they would in an IRA, and take money as needed. This is a balancing act, however, as the retiree still needs to be aware of the risks of removing money and should have a financial plan in place for retirement.

Employers and plan sponsors should think big. Rather than designing retirement savings plans for the length of time the employee is with the company, plans should represent a tool for lifetime retirement savings for all workers.

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.