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Tuesday August

  • 2012
  • 28

Fee Disclosures - What To Do Next

by Martin Suechting in Total Rewards

Retirement Plan Sponsors may be heaving a sigh of relief now that they have received fee disclosures from their vendors and plan participants are starting to get the participant level fee disclosures. However, it may be too early to relax. Now that Sponsors have all this information about fee disclosures and are presumably educated about ‘Revenue Sharing' from mutual funds, there may be an additional step they need to think about. First, did all vendors who were supposed to provide a disclosure actually do so, and do those disclosures contain sufficient detail? Second, are the plan expenses and revenue sharing payments from mutual funds allocated fairly among all plan participants?

While it appears there is no IRS or DOL rule or law that governs exactly how revenue sharing payments are allocated, it is clear that Plan fiduciaries have a duty to consider carefully and prudently how to deal with this new information. Just as the allocation plan expenses is a subject for fiduciary discussion and decision making, so too should the allocation of the revenue sharing payments from various mutual funds. There is no industry standard as to whether or not funds should pay revenue sharing and how much it ought to be. Plan fiduciaries should give careful thought to this issue.

What do I mean? Let's do a brief thought experiment – one that may not be particularly representative of any particular plan, but will serve to illustrate the point. Imagine a small plan, with $2 million dollars, split equally between 2 funds.

Revenue Sharing Available

Assets

Revenue Sharing (%)

Revenue Sharing ($)

Fund A

$   1,000,000

0.3%

$   3,000

Fund B

$   1,000,000

0.0%

$          0

Total

$   2,000,000

$   3,000

 

In the illustration above, Fund A provides for a revenue sharing payment of 0.3% annually and fund B pays nothing.

 

Fees Charged

Provider

Fee (%)

Fee ($)

 

TPA

0.05%

$   1,000

($2,000,000 x 0.0005)

Advisor

0.1%

$   2,000

($2,000,000 x 0.001)

Total

$   3,000

 

 

The TPA/recordkeeper for the plan charges 0.05% annually on total plan assets, and the investment advisor charges 0.1% annually on total plan assets.

In the mind of the plan sponsor, this is a ‘Free Plan' because the revenue sharing available is enough to pay the plan providers. However, is the employer, as a plan fiduciary acting in the best interest of plan participants? Maybe.

Let's assume there are 5 participants: the owner with $1 million in Fund B, and the other 4 participants, each with $250,000 each in Fund A. The owner, who is also the plan fiduciary, is not actually paying anything for plan services, while the other 4 participants carry the burden of paying for the plan through their account balances. The employer, as a plan fiduciary, should review this situation in a prudent manner to determine if this methodology is in the best interest of all plan participants.

The above example may be a ‘worst case scenario', but serves to illustrate the issue that plan fiduciaries should be thinking about. Please contact Bullseye Capital for a thorough review of your plan's fee disclosures and what it means to you as a plan fiduciary.