Understanding Plan Fees and Expenses

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1 Understanding Plan Fees and Expenses Susan M. Wright, CPA, APM Executive Director, Consulting

2 Topics of Discussion Fiduciary Responsibilities Settlor vs. Non-settlor Expenses Revenue Holding Accounts Questions and Answers 2

3 Focus on Fees and Transparency! The Department of Labor (DOL) has implemented several regulatory initiatives focused on increasing awareness by both plan sponsors and plan participants regarding fees charged to retirement plans. Form 5500, Schedule C (changes were effective with the 2009 return and require disclosure of direct & indirect compensation) Fiduciary disclosure rules under ERISA* 408(b)(2) (effective April 1, 2012) Participant disclosure rules under ERISA 404(a)(5) (effective for plan years beginning on or after November 1, 2011 with delayed dates for compliance) *Employee Retirement Income Security Act of 1974, as amended 3

4 (Continued) Focus on Fees and Transparency! The Bottom Line: Plan sponsors and participants will have much greater access to information concerning plan fees and expenses. 4

5 Service Provider Fee Disclosure Rules Service provider fee disclosure requirements under ERISA 408(b)(2): Full fee disclosure by service providers to responsible plan fiduciaries Effective April1, 2012 Final regulations are still pending requirements may change We are reviewing the actions that must be taken, if any, to ensure compliance with the new rules. 5

6 (Continued) Service Provider Fee Disclosure Rules As an industry leader in this initiative, we are committed to helping provide plan sponsors with the necessary information and tools to interpret and understand plan fees. 6

7 Participant Disclosure Rules Participant disclosure requirements under ERISA 404(a)(5): Certain disclosures must be made to plan participants concerning investments offered under the plan and fees/expenses paid from the plan Rule only applies to participant-directed plans Annual notice requirement regarding investments and fees Quarterly disclosure requirement of actual fees and charges 7

8 (Continued) Participant Disclosure Rules Currently effective for plan years beginning on or after November 1, 2011 DOL is expected to issue additional guidance on this new rule Options for the annual notice are under review We are determining necessary modifications to participant statements to separately disclose actual fees and expenses 8

9 Fiduciary Responsibilities ERISA requires plan fiduciaries to act in a prudent manner and solely in the best interest of plan participants and beneficiaries. This broad standard places a number of responsibilities on plan sponsors, including the responsibility to enter into reasonable arrangements with service providers on behalf of the plan where the related expenses are to be borne by plan participants in part or in whole. Under new DOL rules, after April 1, 2012, an arrangement will not be considered reasonable if the service provider has not provided the required disclosures. 9

10 What is considered reasonable? Requirements for arrangements to be considered reasonable: Compensation is reasonable for services rendered Services are necessary for the plan Ability to terminate arrangement without penalty (this does not mean a termination fee cannot be charged) Service provider must provide certain fee disclosures in writing (new requirement) If an arrangement is not considered reasonable, it does not qualify for the prohibited transaction exemption under ERISA 408(b)(2). 10

11 Reasonable does not mean the cheapest! The DOL makes this important point in their 401(k) Plan Fee Disclosure Form : Selecting a service provider requires that you evaluate and differentiate services offered by competing companies. Cost is one of the criteria, but not the only criterion, for making this evaluation. Other factors of equal or greater importance to consider include the quality and type of services provided, the anticipated performance of competing providers and their investment products and other factors specific to your plan's needs. The service provider offering the lowest cost services is not necessarily the best choice for your plan. 11

12 Retirement Plan Fees There are many types of fees and expenses associated with the ongoing administration of a retirement plan. Fees typically fall into three categories: Plan administration Investment-related fees (including advisory fees) Individual participant-level fees Certain expenses, known as settlor expenses, cannot be paid from plan assets. 12

13 Settlor Expenses Settlor expenses represent expenses that must be paid for by the employer because there are associated with the employer s responsibilities as the settlor of the trust. For example, expenses related to the establishment, plan design, or the decision to terminate a plan are generally considered to be settlor expenses. 13

14 (Continued) Settlor Expenses There are two main points to consider when determining if an expense can be paid for by the plan: 1) Is the expense necessary for the on-going operation and administration of the plan? 2) Is the expense discretionary and does it primarily benefit the employer? 14

15 Plan Fee Checklist Common Fees Type of Expense Plan design studies and proposals (initial and on-going) Fee associated with plan document (plan establishment) Discretionary plan amendments Regulatory required plan amendments Annual administration and recordkeeping fees Fees for required participant notices and disclosures Investment expenses and advisory services Trustee and custodial fees Annual plan audit fee (large plan filers) Fidelity bond Fees associated with decision by employer to terminate plan Fees and penalties associated with late filing of Form 5500 or correction of any plan defect Expense can be paid from Plan No Not clearly defined Not clearly defined Yes Yes Yes Yes Yes Yes Yes No No 15

16 Plan Administration Fees Plan administration fees represent the expenses associated with maintaining the plan on an ongoing basis. Common examples include: Recordkeeping services Daily valuation of plan assets Transaction processing Payroll processing Compliance testing Form 5500 preparation Website access Participant call center Trustee and custodial services Fees may be billed separately or included as part of the investment fees. 16

17 (Continued) Plan Administration Fees If billed separately, administration and recordkeeping fees are typically paid from plan assets (either charged directly to participant accounts or paid from a revenue holding account). Charged pro rata in proportion to participant account balances Charged as a flat-fee to participant accounts Combination of both methods If bundled with investment expenses, these fees are always paid from plan assets through a reduction in investment returns. 17

18 (Continued) Plan Administration Fees New Rules: In the past, it was often difficult for plan sponsors to determine how much was being charged for recordkeeping and administration services where the fees were bundled with investment expenses. Effective April 1, 2012, under the new disclosure rules, an estimate of the cost for recordkeeping services must be disclosed! 18

19 Investment-Related Fees Investment-related fees include the fees and expenses associated with the investment alternatives offered under the plan. These expenses are typically stated as a percentage of assets and are paid by the plan through an indirect charge to participant accounts and reflected in net investment returns 19

20 (Continued) Investment-Related Fees Investment-related fees may include: Sales charges (also known as loads or commissions). These are basically transactions costs for buying and selling shares. They may be computed in different ways, depending on the particular investment product. 1 Management fees (also known as investment advisory fees or account maintenance fees). These are ongoing charges for managing the assets of the investment fund. Sometimes management fees may be used to cover administrative expenses. You should know that the level of management fees can vary widely, depending on the investment management and the nature of the investment product. 1 1 Source: Understanding Retirement Plan Fees and Expenses, U. S. Department of Labor Publication 20

21 (Continued) Investment-Related Fees Investment-related fees often include amounts that are paid to third-party service providers by the investment provider in the form of indirect compensation. Indirect compensation is compensation paid to a service provider in connection with services provided by anyone other than the plan sponsor or from plan assets. Common examples of indirect compensation: Commissions paid to an investment advisor Recordkeeping service fees paid to a recordkeeping platform provider or Third Party Administrator (TPA) 21

22 (Continued) Investment-Related Fees New Rules: In the past, these amounts may not have been communicated clearly to the plan sponsor or plan participants by some providers. Under the new DOL rules, these amounts must be disclosed. 22

23 Let s Examine a Typical Mutual Fund Sample Funds: Growth Fund Share Class Total Expense Ratio Fund Operating Expenses Advisor Comp Recordkeeping Service Fees 1 Year Return 3 Year Return 5 Year Return A.69%.34%.25%*.05% or $ % 1.04% 2.88% R %.34% 1.00%.10% 26.67%.29% 2.11% R %.33%.75%.25% 26.71%.32% 2.13% R-3.97%.32%.50%.15% 27.27%.76% 2.59% R-4.68%.33%.25%.10% 27.64% 1.05% 2.88% R-5.39%.34% 0%.05% 28.01% 1.37% 3.19% *Front-end sales charge is also paid to the advisor 23

24 Annual Fees in Dollars and Cents Sample Funds: Growth Fund - $100,000 invested Share Class Total Expense Ratio Fund Operating Expenses Advisor Comp Record-keeping Service Fees Fund Operating Expenses Advisor Comp Recordkeeping Service Fees A.69%.34%.25%*.05% or $ R %.34% 1.00%.10% , R %.33%.75%.25% R-3.97%.32%.50%.15% R-4.68%.33%.25%.10% R-5.39%.34% 0%.05% *Front-end sales charge is also paid to the advisor 24

25 Indirect Compensation Recordkeeping service fees are typically used to offset administrative fees. The recordkeeper might offset fees directly or the amounts may be deposited into a revenue holding account to offset fees. Advisory fees (12b1s, finder s fees, etc.) are typically paid to the advisor but might also be credited back to the plan or deposited into a revenue holding account to offset fees. This normally occurs when an advisor is charging a flat rate for services as a Registered Investment Advisor. 25

26 (Continued) Indirect Compensation New Rules: The new DOL rules require full disclosure of all indirect compensation on Schedule C and under the disclosure rules under ERISA 408(b)(2). Amounts can be expressed as a dollar amount or a formula. 26

27 Individual Participant-Level Fees Individual participant-level fees are typically charged directly to participant accounts. The following are common examples: Distribution fees Loan origination fees Loan maintenance fees QDROs Self-directed brokerage account fees 27

28 Revenue Holding Accounts and Payment of Plan Fees A Revenue Holding Account (also referred to as an ERISA budget account) is an account that is established in the name of the Plan to accept revenue generated from the investment alternatives offered under the plan that would otherwise be payable to a third-party service provider. 28

29 (Continued) Revenue Holding Accounts and Payment of Plan Fees What are the benefits of using a revenue holding account? Ability to track revenue generated from investment alternatives Reduction of expenses charged directly to participant accounts Should all eligible fees be paid by the plan? It depends! The employer may want to pay certain fees or all fees after considering the tax implications (ex. top heavy plan). 29

30 Due Date Chart for New Rules Applicability Date Plan Year Beginning Service Provider Fee Disclosures Initial Participant Annual Disclosure November 1, 2011 April 1, 2012 May 31, 2012 December 1, 2011 April 1, 2012 May 31, 2012 January 1, 2012 April 1, 2012 May 31, 2012 Quarterly Participant Disclosure* Quarter ending July 31, 2012 Quarter ending May 31, 2012 Quarter ending June 30, 2012 * Disclosure must be made for the first quarter that includes May 31,

31 Questions and Answers Please contact your DailyAccess Account Executive at with questions or to request a plan design study. We appreciate the opportunity to be of service to you and your plan participants. Thank You. 31

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