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White Paper: Retirement Plan Fees Explained

Choosing a suitable retirement plan for your organization can be a challenge for even the most experienced committees. The decision-making process can be highly complicated, encompassing investment offerings, administration, and fee arrangements and one wrong move can have significant ramifications for your organization. To avoid this, it is imperative that you learn as much as you can about how these retirement plans work. This can help you reach decisions that benefits plan sponsors as well as plan participants.

This white paper aims to explain one of the most important aspects of choosing a retirement plan: Understanding retirement plan fees.

The typical fee structure of a retirement plan can be very complicated and complex. It carries multiple layers, and deciphering these layers can be a confusing process. In most cases, plan sponsors are too busy keeping track of other critical aspects of the retirement plan to have a clear understanding of what they are paying for. Managing administration, investment management, and recordkeeping typically take precedence over benchmarking of fees. However, failing to focus on this aspect can create unintended consequences for plan sponsors either by paying more than prevailing market rates or worse incurring liability for failure to prudently monitor fees on behalf of plan participants.

Burnham Gibson Wealth Advisors have prepared a three-part series to help plan sponsors and committee members navigate the complexities of retirement plan fees.

Part 1: An Introduction to Retirement Plan Fees: What is Each Fee Called?

In 2012, the Department of Labor directed plan sponsors to disclose retirement plan fees through form 408(b)(2). This disclosure is sent to all participants annually to outline the costs within a retirement plan. There are three types of retirement plan fees. These include:

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After building a basic understanding of the different types of fees within a retirement plan, it is important to investigate how plan providers charge these fees. Weā€™ll begin by addressing how plan providers charge administrative and consulting fees.

Administrative fees are generally charged as a ā€˜flat dollar feeā€™ or an asset charge within the plan. In the ā€˜flat dollar feeā€™ arrangement, participants will see a charge on their statement. No matter the size of the participantā€™s account, this charge is the same for every plan participant throughout the year. In the asset charge arrangement, participants may not see a deducted expense on their statement. However, it can be seen in the 408(b)(2) fee disclosure. This percentage is expensed to the accounts of all the participants. Some retirement plans may employ a combination of these two fee arrangements to make up for the administrative expenses of a plan.

The consulting fees associated with a retirement plan are generally charged on a quarterly or annual basis. These charges are marked as an expense on the entire retirement plan account. Some retirement plans also charge an initial upfront commission on the ongoing contributions made to the plan.

As a plan sponsor, your organization has the liberty to choose how it pays for these costs. These fees are driven by several key factors that affect plan pricing. The larger the plan assets, the lower the plan sponsor out of pocket (per participant) costs. Other factors may include:

  • Number of plan participants
  • Average account balance
  • Service requirements
  • Plan design features
  • Annual contribution flow

Part 2: Investment Expense: Does Class Really Matter?

Being in the right class can make a significant difference. This concept becomes prominent when monitoring investment expenses of retirement plans.

For starters, different share classes represent varying amounts of revenue sharing. These go back to the plan provider and help offset any administrative and/or consulting fees.

Revenue sharing can be defined as payments made by investment managers to service providers that represent the excess amount which has been charged over and above the cost of the investment management. Historically, such allowance may or may not be known to a plan sponsor and their investment committee. Regardless, itā€™s imperative that plan sponsors with fiduciary oversight for their organizationā€™s retirement plan understand how revenue sharing works. These additional expenses can also make a difference in the total return on investment for plan participants.

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The most common forms of revenue sharing can include 12b-1 fees, shareholder servicing fees, and sub-transfer agent (sub-TA) fees. In some instances, a portion of the investment management fee for proprietary funds may include some revenue sharing.

The diagram below illustrates potential fund expenses.

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Besides the aforementioned hurdles, another concern arises when dealing with investment expenses-- the potential for conflicts of interest with a retirement plan.

How does this work? Letā€™s find out.

Each investment made within a retirement plan comes with varying expenses. The nature of these expenses will differ according to the investment option you have chosen. Additionally, these investment options can also vary in terms of the amount of revenue that is shared back to the provider.

A conflict can arise when the cost of the plan is not shared equally among the plan participants. The issue becomes even more significant when a plan participant who has invested in a fund with greater scope for revenue sharing ends up paying more than a participant who has invested in a different share class.

As committee member or plan sponsor, you must try your best to ensure that revenue parity exists within plan expenses and each participant is treated fairly.

Part 3: Paying Retirement Plan Fees: What Is the Best Path for Your Organization?

Retirement plan fees is not a one size fits all conversation; the topic has many different layers. The biggest guide that can be offered is to compare the current plan with what the market has to offer, to accomplish this the sponsor should benchmark the plan.

A full benchmark is more than just comparing fees. Instead, it should also take into account the services extended by your plan provider. You must also bear in mind that the key to a comprehensive analysis and provider comparison is balancing the discussion of fees, services, and investments.

There are dozens of factors that impact plan pricing, including the number of eligible employees and plan participants, average account balance, plan design features, investment philosophy, and specific plan (provider) services. Therefore, an accurate benchmarking method for retirement plan fiduciaries should take the following aspects into consideration:

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One potential area of concern is when there is an accumulation of proprietary funds within the investment line up. Proprietary investments are those investments that are manufactured and managed by the provider. If a planā€™s investment lineup has a high degree of proprietary funds, a conflict of interest arises. To avoid this, investment committees and plan sponsors should carry out an objective analysis of all the investment options available and document the rationale for all their decisions.

The Consultants at Burnham Gibson aim to make retirement planning easier for plan sponsors by guiding our clients through the process proactively every 2 to 3 years. However, in certain situations, the benchmark process may need to be conducted prior to the designated time. This is usually when your retirement plan has not been properly benchmarked over a significant period and/or youā€™ve experienced huge growth in population or assets. In such cases, updating your retirement plan takes high priority.

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Burnham Gibson Wealth Advisors, Inc., is an independent, privately-held firm offering financial planning and investment advice for individuals, and retirement plan services to corporations.

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Investment advisory and asset management services are offered by investment adviser representatives (IARs) through Burnham Gibson Wealth Advisors, Inc. (Burnham Gibson), a registered investment adviser. Burnham Gibson IARs are also, separately and apart from Burnham Gibson, registered representatives who offer securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC, as well as agents who offer insurance and annuity products through AXA Network, LLC, which conducts business as AXA Network Insurance Agency of California, LLC in California, and as AXA Network Insurance Agency of Utah, LLC in Utah. Please note that any Burnham Gibson IAR holding the QKA (Qualified 401(k) Plan Administrator) and/or the CPFA (Certified Plan Fiduciary Advisor) professional designation does so only in his or her capacity as an investment advisory representative with Burnham Gibson and entirely outside of AXA Advisors and AXA Network. Neither designation reflects any AXA Advisors/AXA Network investment advisory or other service or product offering. AXA Advisors and AXA Network do not provide ERISA fiduciary, tax or legal advice and are not affiliates of Burnham Gibson. Individuals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S., which it awards to individuals who successfully complete the CFP Boardā€™s initial and ongoing certification requirements. The CLU®, ChFC®, Chartered Life Underwriter® and Chartered Financial Consultant® marks are the property of The American College, which reserves sole rights to its use, and is used by permission.

Please note that although Burnham Gibson Wealth Advisors, Inc. is Ā a ā€œregistered investment adviserā€, readers should be aware that registration with the SEC or any state securities authority does not imply a certain level of skill or training. Additional information about the AdviserĀ is available on the SECā€™s website at www.adviserinfo.sec.gov.

BGWA.2018.51
PPG 138586 (8/18) (Exp 8/20)