Ensuring the plan is in compliance is a top concern for retirement plan sponsors.1 And for good reason as litigation and regulations have highlighted investment expenses and revenue sharing as important issues.2 With heightened awareness of fiduciary responsibility, it’s important for advisors and plan sponsors to have a thorough understanding of retirement plan fees and how those fees are paid.
Instead, it becomes an exercise in prudence requiring the fiduciary to have a repeatable and defendable process in place for evaluating the effect of fees on participants.
This paper takes a closer look at allocating retirement plan fees and options to consider when it comes to revenue sharing and fee levelization.
Use this as a resource to help make your job a little easier and better understand your fiduciary obligations around plan expenses.
How retirement plan fees can be paid — an overview of retirement plan fees and payment methods
Fee levelization vs. revenue sharing — a closer look at your options
Fiduciary responsibility — key considerations for a prudent process around fee allocation
Retirement plan fees cover administrative activities performed by providers. Fees also pay for resources and services — like a website or call center — to help plan participants enroll and reach retirement savings goals.
Typically plan fees are allocated or collected through one or a combination of fee methods. When revenue sharing isn’t used or it doesn’t cover all of the plan administrative expenses, fees can be billed directly to the plan sponsor or paid from participant accounts.
For plan sponsors who want to levelize fees among retirement plan participants, there can be several different approaches to consider. We’ll offer some considerations for each approach along with more thoughts on revenue sharing.
Let’s take a closer look at how each fee method is applied to participant accounts. For ease of comparison, we’ve included examples based on a plan with recordkeeping fees of 30 basis points.
For plan sponsors who want a clear separation of plan administrative and recordkeeping fees from investment expenses, a zero revenue sharing option provides a simple approach. This can be accomplished in a couple of ways:
A plan sponsor may also choose a combination of the two. Once the plan fiduciary selects the approach that best fits their needs, they will then select the most appropriate fee payment method to fit their situation — billed, deducted, asset-based or a combination. The following examples illustrate collecting recordkeeping fees via an asset-based method:
This approach allows plan sponsors to offset plan expenses through revenue sharing but still allocate fees equally to participants. Revenue sharing is levelized by applying a fee adjustment to each investment option. Think of it as a positive or negative adjustment applied to the revenue sharing of each investment to achieve the agreed rate needed to pay for recordkeeping and administrative fees. See how it works:
This approach allows the service provider to use the revenue sharing amounts received from the investment options to offset plan fees. In this case, plan fiduciaries select investment options that may produce varying amounts of revenue deemed reasonable based on the expected amount of plan fees. Check out this example:
Every plan sponsor and every plan look a little different. So, plan fiduciaries need to determine the approach that will best meet their needs. Since there are many factors to consider, an option may work well for one plan and not be the right choice for another.
As plan fiduciaries explore the various approaches, consider answering these questions.
With the above principles in mind, plan fiduciaries must gather and analyze the relevant facts to make an informed and reasoned decision based on participants’: