Understanding Retirement Plan Fees – 1 Hr CE

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Understanding Retirement Plan Fees – 1 Hr CE

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When you purchased your last car, what factors did you consider?


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Tell me about fees

“ERISA requires employee benefit plan fiduciaries to act solely in the interests of, and for the exclusive benefit of, plan

participants and beneficiaries…”1

1 www.dol.gov/ebsa/fiduciaryeducation.html (Fee disclosure worksheet)


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Tell me about fees

“The service provider offering the lowest cost services is not necessarily the best

choice for your plan.” 1

1 www.dol.gov/ebsa/fiduciaryeducation.html (Fee disclosure worksheet)


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Four basic fee types

1. Asset-based fees

2. Per-participant fees

3. Transaction-based fees

4. Flat rate fees


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Four basic fee categories

1. Investment product fees

2. Plan administration expenses

3. Plan start-up or conversion related expenses

4. Service provider termination related charges


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Investment product fees

• Collective investment funds (CIFs)• Insurance/Annuity products• Mutual funds• Individually managed accounts• Brokerage window• Other product fees


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Collective Investment Funds (CIFs)

A tax-exempt pooled fund operated by a bank or trust company that commingles the assets of trust accounts for which the bank or trust company provides fiduciary services.


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Cost of CIFs

CIF management fee1.00%

Asset management charge 0.75%

Total cost of CIF1.75%


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Insurance / Annuity Products


Insurance Co. Fund Mgt. Fee 0.25%

Retail mutual fundOR

insurance companyfund managed in similar

fashion to specific retail fund 1.15%

Retail mutualfund

1.00%

Asset investment cost = 1.25%

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Insurance/Annuity Product Separate Account (SA)

Insurance product 1.25%

Asset management charge 0.75%

Total cost of SA 2.00%


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Mutual Funds

A key to cost in programs that offer mutual funds is the share class of fund in which they invest.


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Which program is cheaper?

Wrap Product NAV Product

Retail fund 1.00% Retail fund 1.80%

Wrap fee 0.75% Wrap fee 0.00% Total cost 1.75% Total cost

1.80%


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Which program is cheaper?

Wrap Product (Year 2) NAV Product

Retail fund 1.00% Retail fund 1.80% Wrap fee 0.70% Wrap fee 0.00% Total cost 1.70% Total cost 1.80%

This can become even more dramatic if the wrap product has built-in price reductions as assets grow.


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Wrap fees – common types

Tiered Rate

All assets held at the same rate; when breakpoints are reached, the wrap fee on all assets decline.


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Tiered Rate — Example

$750,000 – $999,999 = 0.80%

$1,000,000 – $1,249,999 = 0.75%

Example

Year one, plan has $800,000 = wrap fee is 0.80%

Year two, plan has $1,100,000 = wrap fee is 0.75%


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Blended Rate

Similar to tax brackets, rate breaks are incremental — the cost on the first dollar never goes down.


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Blended Rate — Example $0 - $249,999 = 1.40%$250,000 - $749,999 = 1.00%$750,000 - $999,999 = 0.70%$1,000,000 - $1,249,999 = 0.60%

Blended rate at $1,000,000 = 1.03%


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If all things are equal…

… are all things equal?

What about …

opportunity costs?


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…are all things equal?

Things to check for:1. Proprietary fund requirements

2. Investment category dominated by proprietary funds

3. Additional costs for outside funds


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The Department of Labor fee sheet breaks the soft dollar costs down into hard dollar costs, thus looking at the effect of cost of specific funds, not averages.

What does that mean?


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What is the average fund expense in this contract?

Fund # Fund Exp. 1-year 3-year 5-year

1 0.60% -9.03% 1.43% 3.86%

2 1.20% -6.68% 0.43% 4.86%

3 0.90% 16.03% 12.43% 9.86%

4 1.70% 10.23% 15.68% 13.55%

(1.10%) = (0.6 +0.9 +1.2 +1.7) ÷ 4

(1.30%) = (0.9 + 1.7) ÷ 2

These examples contain fictional information for the purpose of illustrating how average fund operating expenses are calculated


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Be careful with averages

$100,000 in large-cap growth fund at 0.70% = $ 700

$100,000 in small-cap value fund at 0.70% = $ 700

$100,000 in International fund at 1.40% =$1,400

$600,000 in lifestyle fund at 1.20% = $7,200

Average fund cost = 4.00% ÷ 4 = 1.00%

Weighted average fund cost = $10,000 ÷ $900,000 = 1.11%


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Revenue sharing

A mutual fund being used in an annuity product or wrap product has an operating expense of 1.25%, of which 0.25% is a 12(b)1 fee.

What happens to that 12(b)1 fee?


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Revenue sharing

Often the 12(b)1 fee is paid to the insurance company or wrap provider. This will help offset what the provider would normally charge to provide the omnibus trading.

In other programs, it may be paid to the producer or back to the participant (which may lead to higher record-keeping or administration fees).


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Hard dollar vs. soft dollar

The majority of what we have discussed are “soft dollar” costs:

• Borne directly by the plan participant• Do not show as line item expenses in

most programs• Plan participants merely see a net

performance


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Hard dollar vs. soft dollar

What many plan sponsors are looking at are “hard dollar” expenses:

• Those that show as a line item expense • Often only those fees they pay as a

corporation• Many vendors have a way to convert

hard dollar expenses to soft dollar expenses


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Putting it all together

Plan A

Administration and record-keeping $ 5,000

Mutual fund charges $10,000

Annuity or wrap fee ($900,000 at 1%) $ 9,000

Total cost $24,000


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Putting it all together

Plan B

Administration and record-keeping $ 2,500

Mutual fund charges $16,000

Annuity or wrap fee ($900,000 at 0.80%) $ 7,200

Total cost $25,700

At first look, Plan B looks better in two critical elements.


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Other hard dollar items

• Does the administration fee include a signature-ready Form 5500?

• Does the fee include all testing (ADP, ACP, eligibility, top-heavy?)

• What about re-testing or failure correction?

• Per eligible or per participating?


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Per eligible or participating

Let’s say a plan sponsor has a plan with:

– 100 employees eligible to make deferrals

– Only 70 employees are participating


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Per eligible or participating


Vendor A

$25 per eligible(may even be quoted as $25 per “participant,” because if you are eligible you are considered a participant, even if you have $0 balance)

100 x $25 = $2,500

Vendor B

$30 per participant (w/account balance)

$ 0 per eligible (w/ no balance)

70 x $30 = $2,100

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Recap

• Fees and charges can be quoted many different ways

• You need to be sure you are comparing “apples to apples” not “apples to bicycles”


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Questions

Call us at 1-800-626-3112.

Thanks for coming!


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Understanding Retirement Plan Fees – 1 Hr CE