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[object Object],[object Object],www.nyhart.com Presented by Eric Roberts, RIA Copyright 2011. All Rights Reserved.
Eric Roberts ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object]
Fee Transparency Is Coming
The Fee Transparency Timeline Form 5500 Effective 1/1/09 408(b)(2) Interim Final 7/10/10 404(a)(5) Final Reg  10/20/10 408(b)(2) Takes Affect  4/1/12 404(a)(5) Takes Affect  6/1/12 ERISA §408(b)(2) is designed to increase fee transparency
What is 408(b)(2)?
What is 404(a)(5)
How do funds create revenue?  Fees are built into the fund’s structure.
SITUATION ANALYSIS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
How Funds Generate Revenue Share classes feature varying fee structures Example:  American Balanced Fund Share Class Ticker Expense Ratio R-1 RLBAX 1.40% R-2 RLBBX 1.40% R-3 RLBCX 0.94% R-4 RLBEX 0.65% R-5 RLBFX 0.35% R-6 RLBGX 0.30%
SITUATION ANALYSIS Current Plan  – Share Class Selected American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
SITUATION ANALYSIS Actual cost to plan participants  American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Costs % of Plan Assets Total $94,000 0.94% Where does the money go? Admin. & Recordkeeping:  TPA TAKES A $1K HAIRCUT. ($12,000) (0.12%) Custody: ($3,000) (0.03%) Investment Related ( Broker ):  THIS IS NOT AN APPROPRIATE FEE!! ($50,000) (0.50%) Mutual Fund Investment Management: ($24,000) (0.24%) Retained by the mutual fund family: ($5,000) (0.05%) Overage  /  Shortfall  to appropriate fees for services rendered: $29,000
SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $94,000 or $470 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
What happens if we change the share class to an option with lower expenses.
SITUATION ANALYSIS Revised Plan  – Proper Share Class Selected American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
SITUATION ANALYSIS Revised cost to plan participants  American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-4 RLBEX 0.65% 0.24% 0.25% 0.10% Costs % of Plan Assets Total $65,000 0.65% Where does the money go? Administration and Recordkeeping:  $6K SHORTFALL. ($7,000) (0.07%) Custody: ($3,000) (0.03%) Investment Related ( Adviser ): ($25,000) (0.25%) Mutual Fund Investment Management: ($24,000) (0.24%) Retained by the mutual fund family: ($6,000) (0.06%) Overage  /  Shortfall  to appropriate fees for services rendered: $6,000
SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $71,000 or $355 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
What happens if we change to an INDEX option with even lower expenses.
SITUATION ANALYSIS Revised cost to plan participants  Vanguard Balanced Index Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee Admiral Shares VBIAX 0.12% 0.10% 0.00% 0.00% Costs % of Plan Assets Total $12,000 0.12% Where does the money go? Administration and Recordkeeping:  $13K SHORTFALL Custody:  $3K SHORTFALL Investment Related ( Adviser ):  $25K SHORTFALL Mutual Fund Investment Management: ($10,000) (0.10%) Retained by the mutual fund family: ($2,000) (0.02%) Overage  /  Shortfall  to appropriate fees for services rendered: $41,000
SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $53,000 or $265 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
What difference does this make for me and my participants?
Let’s Take An Average Employee ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
How fees impact overall retirement earnings for a participant.
Impact of Fees Time AF Balanced R3 AF Balanced R4 Diff. Vanguard Balanced Diff. 5 $187,569.86 $189,809.42 1.19% $191,578.25 2.14% 10 $298,842.50 $305,104.64 2.10% $310,094.40 3.77% 15 $460,925.18 $474,631.43 2.97% $485,647.47 5.36% 20 $695,360.21 $722,151.61 3.85% $743,869.33 6.98% 25 $1,032,588.09 $1,081,588.96 4.75% $1,121,649.75 8.63% 28 $1,301,482.20 $1,370,333.61 5.29% $1,426,911.41 9.64%
American Funds R3 vs.  American Funds R4:  $68,851.41 or 5.29% American Funds R3 vs. Vanguard:  $125,429.21 or 9.64% Lost Retirement Savings:
ANY QUESTIONS? ,[object Object]
Eric Roberts ,[object Object],[object Object],[object Object],[object Object],[object Object]
So Where is the Peak? ,[object Object],[object Object],Looking for more benefit presentations?
[object Object],16 Actuaries Consulting In 48 States . Nyhart is one of the nation’s largest independent actuarial and employee benefit firms, consulting to and administering the plans for clients with more than $14 billion in assets.  Our team of benefit advisers deliver personalized analysis and recommendations, translating complex calculations and issues into common language that enables corporations, associations, churches and governments to effectively manage their retirement and health care benefits.
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
 

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The Hidden Costs to Participants of High-Fee Funds In Your Portfolio

  • 1.
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  • 5. The Fee Transparency Timeline Form 5500 Effective 1/1/09 408(b)(2) Interim Final 7/10/10 404(a)(5) Final Reg 10/20/10 408(b)(2) Takes Affect 4/1/12 404(a)(5) Takes Affect 6/1/12 ERISA §408(b)(2) is designed to increase fee transparency
  • 8. How do funds create revenue? Fees are built into the fund’s structure.
  • 9.
  • 10. How Funds Generate Revenue Share classes feature varying fee structures Example: American Balanced Fund Share Class Ticker Expense Ratio R-1 RLBAX 1.40% R-2 RLBBX 1.40% R-3 RLBCX 0.94% R-4 RLBEX 0.65% R-5 RLBFX 0.35% R-6 RLBGX 0.30%
  • 11. SITUATION ANALYSIS Current Plan – Share Class Selected American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
  • 12. SITUATION ANALYSIS Actual cost to plan participants American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Costs % of Plan Assets Total $94,000 0.94% Where does the money go? Admin. & Recordkeeping: TPA TAKES A $1K HAIRCUT. ($12,000) (0.12%) Custody: ($3,000) (0.03%) Investment Related ( Broker ): THIS IS NOT AN APPROPRIATE FEE!! ($50,000) (0.50%) Mutual Fund Investment Management: ($24,000) (0.24%) Retained by the mutual fund family: ($5,000) (0.05%) Overage / Shortfall to appropriate fees for services rendered: $29,000
  • 13. SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $94,000 or $470 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
  • 14. What happens if we change the share class to an option with lower expenses.
  • 15. SITUATION ANALYSIS Revised Plan – Proper Share Class Selected American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
  • 16. SITUATION ANALYSIS Revised cost to plan participants American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-4 RLBEX 0.65% 0.24% 0.25% 0.10% Costs % of Plan Assets Total $65,000 0.65% Where does the money go? Administration and Recordkeeping: $6K SHORTFALL. ($7,000) (0.07%) Custody: ($3,000) (0.03%) Investment Related ( Adviser ): ($25,000) (0.25%) Mutual Fund Investment Management: ($24,000) (0.24%) Retained by the mutual fund family: ($6,000) (0.06%) Overage / Shortfall to appropriate fees for services rendered: $6,000
  • 17. SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $71,000 or $355 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
  • 18. What happens if we change to an INDEX option with even lower expenses.
  • 19. SITUATION ANALYSIS Revised cost to plan participants Vanguard Balanced Index Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee Admiral Shares VBIAX 0.12% 0.10% 0.00% 0.00% Costs % of Plan Assets Total $12,000 0.12% Where does the money go? Administration and Recordkeeping: $13K SHORTFALL Custody: $3K SHORTFALL Investment Related ( Adviser ): $25K SHORTFALL Mutual Fund Investment Management: ($10,000) (0.10%) Retained by the mutual fund family: ($2,000) (0.02%) Overage / Shortfall to appropriate fees for services rendered: $41,000
  • 20. SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $53,000 or $265 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
  • 21. What difference does this make for me and my participants?
  • 22.
  • 23. How fees impact overall retirement earnings for a participant.
  • 24. Impact of Fees Time AF Balanced R3 AF Balanced R4 Diff. Vanguard Balanced Diff. 5 $187,569.86 $189,809.42 1.19% $191,578.25 2.14% 10 $298,842.50 $305,104.64 2.10% $310,094.40 3.77% 15 $460,925.18 $474,631.43 2.97% $485,647.47 5.36% 20 $695,360.21 $722,151.61 3.85% $743,869.33 6.98% 25 $1,032,588.09 $1,081,588.96 4.75% $1,121,649.75 8.63% 28 $1,301,482.20 $1,370,333.61 5.29% $1,426,911.41 9.64%
  • 25. American Funds R3 vs. American Funds R4: $68,851.41 or 5.29% American Funds R3 vs. Vanguard: $125,429.21 or 9.64% Lost Retirement Savings:
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Editor's Notes

  1. Amends a prohibited transaction rule under ERISA and the Internal Revenue Code. That rule says that it is a prohibited transaction for a plan to enter into an arrangement with a service provider unless the “arrangement” is reasonable and the compensation being received by the service provider is reasonable. The regulation adds disclosure requirements for the service provider so that plan fiduciaries can determine whether a service provider arrangement is reasonable. What plans are covered? Defined Contribution (i.e. 401(k), ERISA 403(b)) and Defined Benefit Pension plans. Excluded from this definition: IRAs Simplified employee pensions, and Simple retirement accounts.
  2. Because rates are averaged over two years, it will take a couple of years for costs to decline Plans will likely see high requirements drop quickly to zero within a few years of rates increasing
  3. Areas of Expertise Include: Cash Balance Plan Defined Benefit & Pension Defined Contribution & 401(k) Employee Stock Ownership Plan (ESOP) Flexible Spending, HRA & HSA Healthcare Actuarial Consulting Learn more at www.nyhart.com
  4. Areas of Expertise Include: Cash Balance Plan Defined Benefit & Pension Defined Contribution & 401(k) Employee Stock Ownership Plan (ESOP) Flexible Spending, HRA & HSA Healthcare Actuarial Consulting Learn more at www.nyhart.com