Retirement plan sponsors have a lot on their minds, especially in light of recent fee-related lawsuits in the news. As a result, plan sponsors are more aware of their fiduciary role than ever before with over half expressing concern about potential litigation.1
While awareness is good, all of the headlines can often lead to confusion or concern about how best to approach fee allocation. Plan sponsors can take comfort knowing there’s really no one right way. It comes down to knowing and reviewing available options and putting a documented process in place.
As plan sponsors review the options, we want to make sure they have the real insights on fee levelization. For instance, some may think it’s only for large companies and others fear participants will react negatively. Although reasonable assumptions, these aren’t quite accurate. By debunking four common misconceptions we offer fresh perspective on where we see fee levelization working and how it’s being received.
The headlines in the news can often lead to confusion or concern about how best to approach fee allocation.
There’s a lot of buzz about retirement plan fees. And for good reason. But some believe all of the talk has led to widespread adoption of fee levelization among plan sponsors. Turns out the uptake may not be happening as quickly as suspected.
To help get a better sense for what’s currently taking place in the market, we asked advisors about it. The majority of those surveyed report a fairly low percentage of clients currently use a method to levelize or equalize plan administrative fees. Although they do expect that number to grow in the near future.
Other sources have noted a similar trend. According to a recent study, only one-third of plan sponsors recently restructured administrative fees more equally among participants. But another 39 percent say they’re likely to do the same.2 We’ve seen a similar response as the number of advisors and plan sponsors asking questions about fee allocation has grown significantly in the past several months.
It’s certainly catching on, but hasn’t led to what we’d consider wide-spread adoption yet. If plan sponsors have held back due to not seeing immediate action among their peers, they may want to reconsider. As pressure to mitigate risks associated with their fiduciary role increases, the number of those implementing levelization of plan administrative fees will likely keep growing.
With adoption of retirement plan administrative fee levelization on the rise, some believe implementation is concentrated among large companies. After all, many 401(k) plan trends start with larger plans and gradually work their way down market. But as we look across our current client base, we actually find a wide range of plan sizes implementing fee levelization.
A look at our clients proves this isn’t just a trend for the largest organizations, but something that can fit at almost any retirement plan size.
Take for instance, Access Intelligence, a mid-sized media company with 250 employees based in Rockville, Maryland. Not unlike other mid-sized businesses, Access Intelligence has a retirement plan goal to offer the most appropriate, cost-effective investment options and remain compliant.
By levelizing plan administrative fees for all active participants, this company believes they have met both goals. Find out how Access Intelligence achieved their goals and view the results in this case study.
When it comes to levelizing retirement plan administrative fees, a first instinct is often to assume using zero revenue investment options or zero revenue share classes are the least expensive share class. This approach generally appeals to plan sponsors who want to accomplish a clear separation of plan administrative and recordkeeping fees from investment expenses using the simplest method.
But while this method can be the simplest, it’s actually not always cheapest — a common misunderstanding. Sometimes using an investment lineup that includes revenue sharing can be less expensive when the revenue sharing is credited back to participants.
Here we compare a zero revenue share class with a 1.00% investment expense to an I share with a slightly higher 1.01% expense. Unlike the zero revenue share class, the I share has 15 basis points of revenue sharing available to offset plan administrative expenses, such as recordkeeping and advisor fees.
If a plan sponsor uses a zero revenue sharing with fee credits approach, the 15 bps of revenue sharing from the I share is credited back to all participants who elected it. By giving back the credit and subtracting it from the investment expense, the overall net expense is actually 14 bps lower than the zero revenue share class.
Of course that’s not always the case. Take a look at this comparison:
For those considering levelizing their plan administrative fees, but are not quite ready to pull the trigger, we often hear concerns about participants’ reaction to retirement plan fees. According to a recent report that’s valid, 6 in 10 participants don’t know what fees they pay or say their employer pays all of the fees.6 By implementing fee levelization, participants may become more aware of the fees they pay. But that’s not necessarily a bad thing.
To better understand this concern and, more importantly, the impact on savings, we took a look at participants in our retirement plans. By analyzing three major savings factors — participation, deferral and account balance — we determined plan administrative fee levelization did not negatively impact participant actions.
Participation rates
between 75%-100%
Participation rates
between 75%-100%
Fee levelization
average
Industry
average
Fee levelization
average
Industry
average
Levelization doesn’t seem to hurt plan outcomes, but what about it raising more questions and concerns from employees? According to one of our clients, that simply wasn’t the case.
“We had a lot of discussion around exactly how this was going to work. How do we communicate to participants? Will they understand? This is where we spent most of our time,” said Michelle Levy, compensation and benefits manager for Access Intelligence. “Our biggest surprise during implementation was that we only had a few questions from our participants.”
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PQ11486-06 | 558200-052018 | 8/2018