Fee structure: Going beyond the regulations in retirement plan strategy

Navigating nuances

It’s not overdramatic to say that the way you structure and manage fees is a direct reflection of your dedication to creating a retirement plan that truly serves your employees and supports your business objectives. This is a demanding area for consideration, because there are a lot of nuances.

By conducting regular fee allocation studies, utilizing low-cost share classes, and developing robust reporting processes, you lay the foundation for a transparent and equitable fee system. In addition to fiscal prudence, applying best practices in fees helps to build and maintain trust among your employees.

Here are two examples about why fees matter so much, both drawn from our own experience working with clients:

Example 1: Investment elections shouldn’t impact fees

• We often encounter prospective clients whose plans utilize investment options that pay revenue sharing, which is used to partially or wholly offset plan fees. But what happens when some funds generate higher, lower, or no revenue sharing?
• Your participants’ investment elections can now impact how much of the plan’s fees they pay.
• Some participants may pay more or less than others simply on the basis of selecting investments that are appropriate for their personal investment and savings strategy.
• Revenue sharing can lead to serious (if unintended) discrimination among your plan participants if it’s used to pay plan fees and not levelized—that is, all funds utilized generating the same number of basis points toward revenue sharing.

Revenue sharing, if properly disclosed and transparently applied, isn’t bad per se. But if utilized, revenue sharing should definitely be levelized. Furthermore, our best practice, when selecting a fund that offers revenue sharing, is to return all revenue sharing to the participant(s) invested in the fund. In this way, each participant benefits from the lowest investment cost possible.

Example 2: Pull back the curtains on plan fees

Often we see prospective clients who have no idea what their plan fees are. Some believe the plan provider charges nothing to service their plan (which usually means the fee is paid through underlying fees in proprietary investments offered within the plan).

With these prospective clients—and indeed all our clients—we pull back the curtain on fees. We make sure clients know how much they are paying. We also benchmark fees annually against an unbiased collection of like-sized plans in a comparable industry captured by a non-proprietary service.

In our experience, transparency—direct and conversation surrounding plan fees—builds a solid foundation of trust. Also, in the plans we offer, fees are fully transparent as plans do not encounter investment transaction fees. That’s because fees generated from buying and selling of a mutual fund and any 12b-1 fee rebates offered by a mutual fund are returned directly to plan participants invested in that fund.

Best practices for fee structure

Now let’s turn to best practices. As with prior entries in this series, we’ve captured the heart of the matter in a table highlighting both “why” and “what.”

Fixed Fee Arrangements Instead of Asset-Based Fees with Service Providers

What it is: 
Fee structure where costs are fixed and not based on the size of assets under management.

Why it matters to the business owner: 
Offers predictable costs regardless of asset growth, potentially reducing expenses as assets increase.

Why it matters to the employee:
Ensures that fees don't disproportionately eat into retirement savings as account balances grow.

Expense Ratios Rank in the Lowest 50% of Peers

What it is: 
Choosing investment options with expense ratios lower than half of their peers.

Why it matters to the business owner: 
Aids in controlling plan costs, potentially improving overall plan returns.

Why it matters to the employee:
Lower investment costs can lead to higher net returns for participants, enhancing retirement savings.

Fee Allocation Study Every Two Years

What it is: 
Regular analysis of fee structures and how they are allocated among participants.

Why it matters to the business owner: 
Ensures ongoing fairness and competitiveness of fee structures. Helps in maintaining compliance and fiduciary responsibilities.

Why it matters to the employee:
Reinforces the plan's commitment to fair cost distribution and cost-effectiveness for participants.

Utilization of the Lowest Cost Share Classes Available

What it is: 
Selecting the most cost-effective share classes for investment options in the plan.

Why it matters to the business owner: 
Maximizes investment efficiency and can improve plan performance.

Why it matters to the employee:
Provides participants with the benefit of lower costs, which can accumulate to significant savings over time.

Development of Reporting Process to Independently Track, Monitor, Document, and Benchmark All Service Provider Compensation

What it is: 
Establishing a transparent system for monitoring all fees associated with the plan, including indirect costs.

Why it matters to the business owner: 
Enhances oversight and control over plan costs, aids in vendor negotiations and compliance.

Why it matters to the employee:
Promotes trust in the plan's management and assurance that fees are reasonable and transparent. 

Eliminate Any Varying Levels of Revenue Sharing and Service Provider Compensation

What it is: 
Adopting a uniform approach to revenue sharing and compensation, avoiding varying fee levels.

Why it matters to the business owner: 
Simplifies fee structures, reducing administrative complexity and potential for conflicts of interest.

Why it matters to the employee:
Ensures fairness in fee allocation, avoiding scenarios where some participants pay more than others.

Next steps

With a solid plan design established, it’s time to zero in on our next topic in going beyond the regulations: Investment Process.