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Understanding Retirement Plan Fees & Expenses


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Understanding Retirement Plan Fees & Expenses

  1. 1. Understanding Retirement Plan Fees & Expenses ©2003 – 2013 Multnomah Group, Inc. All Rights Reserved.
  2. 2. Brian A. Montanez, AIF, CPC, TGPCA Principal of the Multnomah Group, Brian is responsible for client service andbusiness development in Northern California. Brian advises an array oforganizations, including healthcare and educational institutions. Brian regularlyconsults with plan sponsors on plan design, fiduciary governance issues,investment menu construction, and vendor fees/services.Brian is an AIF, Accredited Investment Fiduciary certified by the Center forFiduciary Studies, and a QPA, Qualified Pension Administrator, QKA, Qualified401k Administrator and a QPFC, Qualified Plan Financial Consultant accreditedand holds a Tax-Exempt and Governmental Plan Administrators Certificate bythe American Society of Pension Professionals and Actuaries (ASPPA). Heholds a B.S. in Economics and Finance from Bentley University inMassachusetts.2 Understanding Retirement Plan Fees & Expenses
  3. 3. Agenda• Why Understanding Fees is Important• Fiduciary Obligations Regarding Fees• Detailed Review of Common Plan Fees• 10 Steps Every Plan Sponsor Should Take3 Understanding Retirement Plan Fees & Expenses
  4. 4. Affect of Higher FeesTwo participants, Jim and Marcia, both save $2,000 per year for retirement intheir company’s 401(k) plan. Both start saving at age 25 and save $2,000 ayear until they retire at age 65. They both invest their money in mutual fundsthat provide them with a gross rate of return of 10% per year. The onlydifference is that Marcia incurs only 1% per year in expenses while Jim incurs2% per year. $800,000 $700,000 $600,000 $500,000 Age (Years) $400,000 $300,000 $200,000 $100,000 $- 25 30 35 40 45 50 55 60 65 Por tfolio Value ($) Jim Marcia4 Understanding Retirement Plan Fees & Expenses
  5. 5. Fiduciary ObligationOne of the primary obligations of a responsible plan fiduciary is to determinethe reasonableness of the fees incurred by participants in the plan in relation tothe services received by the plan.According to the Department of Labor (DOL): “Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.” Understanding Retirement Plan Fees and Expenses (December, 2011) U.S. Department of Labor, Employee Benefits Security Administration5 Understanding Retirement Plan Fees & Expenses
  6. 6. Tussey v. ABB, Inc.In Tussey v. ABB, Inc. (March 31, 2012), a district court in Missouri awardedplaintiffs more than $35 million in damages against 401(k) plan fiduciaries forbreaching their duties under ERISA.• Never calculated the amount paid via the revenue sharing arrangement• Did not consider its ability to leverage the plan’s size and did not negotiate lower fees for plan participants• Had 401(k) plan subsidize other corporate benefits6 Understanding Retirement Plan Fees & Expenses
  7. 7. Plan Fees & ExpensesGenerally, retirement plan fees can be classified into three main categories, butthe associated services may apply to multiple categories. For the purposes ofthis webinar, we will categorize the fees and then suggest the specific functionstypically related to each expense.• Asset-Based Fees and Expenses • Calculated as a percentage of plan assets and can be based on a portion or all assets of the plan• Participant-Based Fees and Expenses • Calculated based on the number of participants in the Plan or eligible for the Plan• Itemized Service Fees and Expenses • Typically applied as a fixed charge for a specific service provided, such as a participant loan or hardship distribution, testing, plan implementation or plan termination• Other • Professional and other miscellaneous investment and contract fees7 Understanding Retirement Plan Fees & Expenses
  8. 8. Asset-Based Fees – Investment ProductsCommon Investment Products and Associated Fees:• Mutual Fund • Expense Ratio • Investment Management Fee • Administrative Expense • Trading Expenses • Revenue-Sharing• Collective Investments / Comingled Investment Funds • Expense Ratio • Investment Management Fee • Administrative Expenses • Trading Expenses • Revenue-Sharing8 Understanding Retirement Plan Fees & Expenses
  9. 9. Asset-Based Fees – Investment Products• Stable Value Accounts • Expense Ratio • Investment Management Fee • Administrative Expense • Trading Expenses • Revenue-Sharing • Market Value Adjustment• General Account / Guaranteed Investment Contracts (GICs) • General account of the issuing insurer • No explicit: • Investment Management Fee • Administrative Expenses • Trading Expenses • Revenue-Sharing • “Revenue” based on spread between investment earnings and crediting rate9 Understanding Retirement Plan Fees & Expenses
  10. 10. Asset-Based Fees – Investment Products• Variable Annuity Contracts • Underlying Investment Product Fees, plus: • Variable Asset Charge • Mortality and Expense (M&E) Fee • Insurance-Related Charges • Surrender and Transfer Fees• Wrap Fees & Expenses • Catch All • Recordkeeping • Custodial • Administrative, Testing & 5500 • Employee Communication10 Understanding Retirement Plan Fees & Expenses
  11. 11. Asset-Based Fees – Revenue Sharing• Revenue Sharing • 12b-1 Fee • Shareholder Servicing Fee • Sub-Transfer Agency Fees (SUB-TA) • Commissions• Services Can Include • Recordkeeping • Administration • Compliance • Education • Payment to Selling Agent or Broker11 Understanding Retirement Plan Fees & Expenses
  12. 12. Participant-BasedParticipant-Based Fees and Expenses are calculated based on the number ofparticipants in the Plan or eligible for the Plan and may be a base fee plus aunit charge. Typically, they are charged to the participant for individual servicesfor that participant, or to the sponsor for the service performed.Services May Include:• Participant Statements• Education & Enrollment• Administrative Services• Technology Access• Call-Center Availability12 Understanding Retirement Plan Fees & Expenses
  13. 13. ItemizedItemized Service Fees are generally charged on an as-incurred basis, and maybe paid by the plan sponsor, by the plan, or by the participant. They are feesfor specific services detailed in the vendor’s service agreement.Some itemized fees are participant-based (i.e., fees charged on a perparticipant basis) while others are charged for a specific service to the entireretirement plan.Itemized Service Fees and Expenses are typically applied as a fixed charge fora specific service provided such as a Participant fee for a loan or hardshipdistribution, or a Sponsor fee for plan implementation or plan termination.13 Understanding Retirement Plan Fees & Expenses
  14. 14. Itemized• Brokerage Window• Investment Advice• Outside / Legacy Asset Recordkeeping Fee• Custody Fees• 5500 Preparation• Special Participant Mailings• Trustee Fees • Directed • Discretionary• Special Compliance Testing • New Comparability • Social Security Integration • Controlled Group Testing• Plan Termination14 Understanding Retirement Plan Fees & Expenses
  15. 15. Fees - OtherThe fees discussed so far are the most common types of fees paid for ongoingservices provided to retirement plans.These “other expenses” are fees that might be charged and are typicallydetailed in a service agreement, but need to be understood.15 Understanding Retirement Plan Fees & Expenses
  16. 16. Fees – Other• Professional (Optional): • Audit • Legal • Consulting• Sales Charges • Front End • Finders Fees • Back End • Contingent Deferred Sales Charge (CDSC)• Exchange Fees / Early Redemption Fees • Typically in less liquid asset classes, exchange / early redemption fees designed to limit short-term trading in the fund • Charged by the fund to an investor as a redemption expense when the investor sells out of a fund after a short period of time (typically 60 to 90 days) • Paid back into the fund to compensate the fund for the costs of the investor’s short-term trading activity • The SEC generally limits redemption fees to 2% of invested assets16 Understanding Retirement Plan Fees & Expenses
  17. 17. Fees – Other• Market Value Adjustment • Cost that is incurred to liquidate an investment (typically fixed income) earlier that what was initially anticipated upon or agreed to • Found in investment products where liquidity is limited and is dependent on the market environment at the time liquidation is requested • Stable value / GIC products • If interest rates in the market are higher than when the investor initially purchased the investment, the adjustment may cause the redemption value to be lower.• Puts on Redemption • Anywhere from 12 months to 10 years17 Understanding Retirement Plan Fees & Expenses
  18. 18. Fee Policy Statement1. Best Practice2. The purpose of this document is as follows: 1. To segregate business decisions from fiduciary decisions 2. To identify plan fees 3. To determine which expenses are allowed to be paid by the plan 4. To state the amount of administrative expenses to be covered by the Sponsor 5. To establish a mechanism for charging expenses and allocating expenses to the Trust that are not paid by the Sponsor 6. To assign responsibility to those charged with oversight of the plan fees. 7. To set a policy against using the assets of a qualified plan assets to pay or offset fees charged under a nonqualified or ineligible plan18 Understanding Retirement Plan Fees & Expenses
  19. 19. 10 Steps Every Plan Sponsor Should Take1. Develop a Fee Policy Statement2. Demand fee disclosure - 408(b) Notice3. Review to ensure comprehension of 408(b) Notice4. Perform a fee audit annually5. Benchmark your plan’s fees6. Negotiate a better fee “structure”7. Lock-In fees8. Consolidate investment managers / share classes9. Use passive investment products10. Be willing to put your services out to bid19 Understanding Retirement Plan Fees & Expenses
  20. 20. DisclosuresMultnomah Group, Inc. is an Oregon corporation and SEC registeredinvestment adviser. Current or prospective clients may request a copy ofMultnomah Group’s Form ADV Part 2A by contacting us.Information contained herein is provided “as is” for general informationalpurposes only and is not intended to be completely comprehensive regardingthe particular subject matter. While Multnomah Group takes pride in providingaccurate and up to date information, we do not represent, guarantee, or provideany warranties (express or implied) regarding the completeness, accuracy, orcurrency of information or its suitability for any particular purpose.Receipt of information herein does not create an adviser-client relationshipbetween Multnomah Group and you, and we have not assessed the suitabilityor potential value of any particular investment. Neither Multnomah Group norany of our advisory affiliates provide tax or legal advice or opinions. You shouldconsult with your own tax or legal adviser for advice about your specificsituation.20 Understanding Retirement Plan Fees & Expenses