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401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
Understanding Plan Expenses
As the spon...
401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
Plan Administration Fees. The day-to-da...
401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
For this reason, these fees, which are ...
401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
12b-1 fees: Account servicing and accou...
401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
typically have various types of fees an...
401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
Explicit Asset Charges
Custody Fees - C...
401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
Once you have a clear idea of your requ...
401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
2. Obtain from your provider all inform...
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Understanding Plan Expenses

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Understanding Plan Expenses

  1. 1. 401K PROADVISOR - ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM Understanding Plan Expenses As the sponsor of a retirement plan, you are helping your employees achieve a secure financial future. Sponsoring a plan, however, also means that you, or someone you appoint, will be responsible for making important decisions about the plan’s management. Your decision making will include selecting plan investments or investment options and plan service providers. Many of your decisions will require you to understand and evaluate the costs to the plan. The Federal law governing private-sector retirement plans, the Employee Retirement Income Security Act (ERISA), requires that those responsible for managing retirement plans -- referred to as fiduciaries -- carry out their responsibilities prudently and solely in the interest of the plan’s participants and beneficiaries. 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. Why Consider Fees? Plan fees and expenses are important considerations for all types of retirement plans. As a plan fiduciary, you have an obligation under ERISA to prudently select and monitor plan investments, investment options made available to the plan’s participants and beneficiaries, and the persons providing services to your plan. Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary’s responsibility. This responsibility is ongoing. After careful evaluation during the initial selection, you will want to monitor plan fees and expenses to determine whether they continue to be reasonable in light of the services provided. In recent years, there has been a dramatic increase in the number of investment options, as well as level and types of services, offered to and by plans in which participants have individual accounts. In determining the number of investment options and the level and type of services for your plan, it is important to understand the fees and expenses for the services you decide to offer. The cumulative effect of fees and expenses on retirement savings can be substantial. What Are The Types Of Plan Fees And Who Pays For Them? There are a variety of plan fees and expenses that may affect your retirement plan. The following is an overview of some of those fees and expenses and the different ways in which they may be charged. Plan fees and expenses generally fall into three categories:
  2. 2. 401K PROADVISOR - ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM Plan Administration Fees. The day-to-day operation of a plan involves expenses for basic administrative services -- such as plan recordkeeping, accounting, legal and trustee services -- that are necessary for administering the plan as a whole. In addition, a profit-sharing or 401(k) plan also may offer a host of additional services, such as telephone voice response systems, access to a customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation, and on-line transactions. In some instances, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. In other instances, when the administrative costs are billed separately, they may be borne, in whole or in part, by the employer or charged directly against the assets of the plan. In the case of a 401(k), profit sharing, or other similar plan with individual accounts, administrative fees are either allocated among individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses, (a “pro rata” charge)) or passed through as a flat fee against each participant’s account (a “per capita” charge). Generally the more services provided, the higher the fees. Individual Service Fees. In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under an individual account plan. Individual service fees may be charged separately to the accounts of those who choose to take advantage of a particular plan feature. For example, fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions. Investment Fees. By far the largest component of plan fees and expenses is associated with managing plan investments. Fees for investment management and other related services generally are assessed as a percentage of assets invested. Employers should pay attention to these fees. They are paid in the form of an indirect charge against the participant’s account or the plan because they are deducted directly from investment returns. Net total return is the return after these fees have been deducted.
  3. 3. 401K PROADVISOR - ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM For this reason, these fees, which are not specifically identified on statements of investments, may not be immediately apparent to employers. Fees and Expenses May Not Always be Apparent Plan administrative and investment services may be provided through a variety of arrangements: Some or all of the various plan services and investment alternatives may be offered by one provider for a single fee paid to that provider (sometimes referred to as a bundled arrangement). The provider will then pay, out of that fee; any other service providers that it may have contracted to provide the services. In other cases, plans may obtain services and investments from a variety of providers (sometimes referred to as an unbundled arrangement). The expenses of each provider (e.g., investment manager, trustee, record keeper, communications firm) are charged separately. Plans also may use an arrangement that combines a single provider for certain services, such as administrative services, with a number of different providers for investments. Fees need to be evaluated keeping in mind the cost of all covered services. To determine the source of fees and compensation that a provider receives in connection with the plan, you'll need to review non-explicit fees and expenses as well as revenue sharing arrangements with each investment option. Key non- explicit fees include: Soft dollars: Soft dollar "excess commissions" are monies paid to brokerages as defined by Securities Exchange Commission (SEC) Rule 28(e). Ask your provider who receives soft dollar benefits from mutual funds or other investments in your plan and what benefits have they received or continue to receive. Sub-TA fees: Sub-shareholder (participant) servicing fees a.k.a. "sub-transfer agent fees," "sub- TA fees" or "shareholder servicing fees." Are your providers receiving sub-transfer agent or shareholder servicing revenues, and if so, are the revenues offset against the costs as described in your service agreement? Check to see if you have signed a disclosure form that specifies each type of fee and the specific number of basis points or per participant charge assessed for each type of fee.
  4. 4. 401K PROADVISOR - ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM 12b-1 fees: Account servicing and account distribution (sales) based 12b-1 fees. Your provider may also receive 12b-1 fees. What is the basis point rate of the 12b-1 gross revenue they receive? Did they place your plan's assets in a particular share class for a reason? You should have signed a disclosure form detailing the basis points charged as a 12b-1 fee for each fund in your plan. IMPORTANT NOTE: Revenue sharing allows Plan Providers to either retain additional compensation – that may or may not be disclosed - OR offer lower fees for retirement plan administration expenses through using revenue sharing as rebates and incentives, in the form of Sub TAs or 12b-1fees, paid by mutual fund companies for retirement plan assets. Demand that your Plan Provider disclose all revenue sharing arrangements and whether the revenue sharing is being applied as a fee offset to reduce plan expenses or kept as additional compensation to the Plan Provider. What Fees Are Associated With The Investment Choices In My Retirement Plan? Apart from fees charged for administering the plan itself, there are types of fees that may be charged in connection with plan investments or investment options made available to participants and beneficiaries. The evidence shows that the largest element of costs for retirement plans are asset- based fees and expenses; typically imposed as expense ratios of the investment products, mortality and expense fees imposed on assets in group annuities, and wrap fees. Asset-based fees generally comprise 75% to 95% of the total fees and expenses paid from plan assets. Asset-based fees are found in three categories: Investment Products, Insurance Charges, and explicit Asset Charges. Investment Products Investment products come in a variety of forms. The most common investment product is mutual funds. A mutual fund is a professionally-managed type of collective investment product that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. They typically have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are typically distributed to the investors annually. Mutual funds
  5. 5. 401K PROADVISOR - ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM typically have various types of fees and expenses related to them and are summarized and stated as the expense ratio. An expense ratio is a fee charged as a percentage of the assets invested in a particular mutual fund. A typical mutual fund expense ratio can range between 0.20% and 2.0% of fund assets. The expense ratio can be broken down into three main categories: Investment Management, Administrative and Revenue-Sharing. Special Note on Trading Expense: Trading costs are part of the costs associated with investment management but they are not included in the expense ratio of a fund. Instead, they are paid by the actual shareholders out of the invested assets. In practical terms, this fee represents the cost of buying and selling securities. It includes the commissions charged to buy or sell a security; the liquidity cost for trading the security, which is represented by the spread between the bids and ask price; and the market impact of trading. These expenses can range from an average 0.27% for low turnover domestic equity funds to 1.65% for high turnover domestic equity funds.¹ Insurance Fees & Expenses Variable Annuity Contracts - Insurance companies frequently use variable annuity contracts as the funding vehicle for retirement plans. The investment products are generally a mix of proprietary and non-proprietary investment products contained in separate accounts offered to participants. The variable annuity contract can include a "Variable Asset Charge" or other additional fees wrapped around the investment alternatives. Participants select from among the investment alternatives offered, and the returns to their individual accounts are reduced by the amount of any additional charges built into the contract. Surrender and Transfer Fees - An insurance company may charge these fees when an employer terminates a contract (in other words, withdraws the plan's investment) before the term of the contract expires, or withdraws a significant amount from the contract. Surrender and transfer fees may be imposed if one of these events occurs before the expiration of a stated period and commonly decrease and disappear over time - typically 10 years.
  6. 6. 401K PROADVISOR - ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM Explicit Asset Charges Custody Fees - Custody fees are expenses associated with a service provider (such as a bank) holding the assets of the retirement plan. Custodians often carry the responsibility and liability associated with executing trades, investment directions, and distribution requests from participants, record keepers, and plan administrators. A typical fee structure for custody services might include an annual fixed expense for ownership of a custody account, and possibly include a small asset-based fee as well. Investment Advice Fees - More and more sponsors are entering into agreements with organizations that agree to provide investment selection and monitoring of the investment alternatives of the Plan. In exchange for fees that are paid by either the plan sponsor, from the assets of the retirement plan or from the accounts of the participants who elect to use the advice services, the organization agrees to be a fiduciary of the retirement plan. What Steps Can I Take To Evaluate Plan Fees And Expenses? Fees and expenses are one of several factors to consider when you select and monitor plan service providers and investments. The level and quality of service and investment risk and return will also affect your decisions. Begin by establishing an objective process to aid in your decision making. This process should include an understanding of the fees and expenses you will pay and a review of those charges as they relate to the services to be provided and the investments you are considering. Before negotiating with prospective providers, think about the specific services you would like from a service provider (e.g., legal, accounting, trustee/custodian, recordkeeping, investment management, investment education or advice). Include the types and frequency of reports you wish to receive, communications to participants, meetings for participants, and the frequency of participant investment transfers. You will also need to consider the level of responsibility you want the prospective service provider to assume, the services that must be included in any retirement plan, the possible extras or customized services you wish to provide, and optional features, such as loans, Internet trading, and telephone transfers.
  7. 7. 401K PROADVISOR - ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM Once you have a clear idea of your requirements, you are ready to begin receiving estimates from prospective providers. Give all of them complete and identical information about your plan and the features you want so that you can make a meaningful comparison. This information should include the number of plan participants and the amount of plan assets as of a specified date. In addition, ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. To help in gathering information and making comparisons, you may want to use the same format for each prospective provider. See an example of a uniform fee disclosure format that will help you in selecting and monitoring the services to your plan. Once you have selected a service provider or investments, be prepared to monitor the level and quality of the services and performance of investments to make sure they continue to be reasonable and they suit the needs of your employees. Make sure that you receive information on a regular basis so that you can monitor investment returns and service provider performance and, if necessary, make changes. All plan expenses, whether paid by the company, passed on to your participants or shared, should be clearly documented and as ERISA requires "reasonable." Reasonableness can be determined by evaluating the services included and by benchmarking against other plans with similar characteristics and features. Points to Remember 1. Ask your providers for an annual written statement describing all compensation, both direct and indirect, received by the provider for plan services including the estimated costs of administration, recordkeeping, mutual fund management and administration fees, 12b-1 service fees, shareholder servicing fees, sub-transfer agency fees, any start up or conversion-related charges, any service provider termination expenses, and any separately imposed charges for participant services. If your plan is with an insurance company, be sure administration, annuity, insurance, and other costs are specified, whether charged initially as fund costs or against your plan assets.
  8. 8. 401K PROADVISOR - ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM 2. Obtain from your provider all information on fees and expenses as well as revenue sharing arrangements with each investment option. Determine the availability of other mutual funds or share classes within a mutual fund with lower revenue sharing arrangements prior to selecting an investment option. You may want to select a share class with higher revenue sharing to cover the costs of recordkeeping and other services of your plan, but this should be an informed, conscious decision by you. 3. Identify distribution-related costs including who is receiving any sales commissions, finder's fees and 12b-1 distribution fees and how much is received from each investment option. 4. Periodically monitor asset-based fees. Fees can grow with the size of your plan's assets regardless of whether any additional services are provided. This is for information purposes to be used as a guide only. It should not be considered as legal advice. Consulting an ERISA attorney is recommended before taking action in these areas. William Kring, CFP, AIF, is chief investment officer and accredited investment fiduciary for Wealth and Pension Services Group, Inc. an SEC registered investment advisor. Kring is also the founder of 401k ProAdvisor, a full service retirement plan manager, where he assists ERISA retirement plans in meeting their fiduciary responsibilities through fiduciary consulting services, monitoring, reporting services, and investment management. For comments or questions, email to bill@401kProAdvisor.com

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