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.” However, fees charged in the retirement plan industry are confusing and opaque to say the least.
In this blog, I will introduce the common fees found in retirement plans.
Asset-based Fees
The evidence shows the largest element of costs for retirement plans are asset-based fees and expenses. The fees are typically imposed as expense ratios of the investment products, mortality, and expense fees imposed on assets in group annuities, and wrap fees on non-annuity assets.
Asset-based fees generally comprise 75% to 95% of the total fees and expenses paid from plan assets, and can classified in three categories:
1. Investment Produce Fees (Expense Ratio)
A Mutual Fund, or Collective Investment Trust 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 actively manages the money (Active Managed Fund) on a regular basis or are invested in accordance with a specific index (Index Fund). The Expense Ratio is the fee charged as a percentage of the assets invested in a particular mutual fund.
The expense ratio can be broken down into two main categories:
Investment Management Fee
This fee is charged to pay for the function of investment management; mainly the portfolio manager’s time, the internal research and support of the investment management organization, and other associated expenses related to deciding which securities the mutual fund will acquire or sell. Typically, this fee ranges from 0.25% to 1.0% of assets in the fund.
Revenue-Sharing
This fee usually consists of 12b-1 Fees, Shareholder Servicing fees, Sub-Transfer Agency Fees, and Commissions. 12b-1 fees are charged by some mutual funds to cover the expense associated with marketing and distributing as well as to pay the Third-Party Administrator (TPA) for plan administration or recordkeeping services. We find that this fee generally ranges between 0.25% and 1.0% of invested assets.
2. Insurance Fees
Insurance companies frequently use variable annuity contracts as the funding vehicle for smaller 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. Variable annuity contracts also include one or more insurance elements. Generally, these elements include an annuity feature or interest and expense guarantees, and sometimes a death benefit is provided during the term of the contract. However, most of the Variable Asset Charge will pay for general administration, recordkeeping, participant services, and commissions paid to the selling agent and/or broker.
3. Asset-based Wrap Fee
In cases where the vendor does not receive revenue sharing and does not utilize an insurance contract, they may assess a wrap fee on the retirement plan. The wrap fee is an all-inclusive asset-based fee imposed on the value of total assets in an account. These fees are a catch-all that can be used to pay for plan services from compliance testing to trust reporting. A wrap fee may cover all the expenses except for itemized fees and investment management costs, and will be in addition to the fees the investment products charge.
Per Participant Fees
Per participant fees are calculated as a flat charge per participant or eligible employee. These fees are typically assessed per participant in addition to other annual fees. Depending on how the retirement plan is structured, the expenses are charged directly to the participant’s account, or billed directly to the plan sponsor. These fees are similar to Itemized Fees in that they are charged for administration services. The difference is that these fees are charged for plan level services rather than for a specific service being performed.
Itemized Service Fees
Itemized Fees are typically charged on an as-incurred basis, and may be paid by the plan sponsor, by the plan, or by the participant. They are fees for specific services detailed in the vendor’s service agreement. Some itemized fees are charged for a specific Itemized initiated by the participant such as a loan or distribution, while others are charged for a specific plan level service such as the preparation and filing of the Form 5500 or performing required Nondiscrimination testing. In other cases, the asset-based fee may cover these services. Check your services agreement.
Conclusion
According to Warren Buffet, “Price is what you pay. Value is what you get.” But the first step is understanding what you pay.
For more information, please join our webinar on this topic on August 29 (registration information coming soon!) or read our white paper A Guide to Retirement Plan Fees and Expenses.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.
Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.