An article published by the Urban Institute on April 8th shares compelling data on the bleak post-pandemic outlook for the security of retirement savings. Poor stock market performance, reduced employee and employer contributions, increased and earlier withdrawal rates, and risks to defined benefit plan funding are a handful of threats to the American saver's financial future [1].
Employers who offer a retirement plan to employees have a fiduciary obligation to be good stewards of plan participant accounts. A very important way to do this is to keep plan fees at bay, particularly if opting to have plan costs paid from the plan (participant retirement savings balances).
There are 4 key fees plan sponsors should be monitoring.
1. Record Keeping Fees
Record keeping fees are used to cover things like providing customer service to participants, tracking and reporting account activities, providing an investment platform and investment performance reporting, and providing technology for the plan sponsor and participants. It is common for record keepers to charge an asset-based fee which is determined by the average participant balance. Some record keepers have per-participant charges and hard-dollar annual fees. Some record keepers receive what is called "revenue sharing", received from the investment companies they partner with (and make available to plan participants). Revenue sharing is not without conflicts and is becoming less common as the retirement plan industry has evolved.
2. Third Party Administrator (TPA) Fees
The Third Party Administrator, or TPA, is responsible for helping the plan sponsor interpret and comply with ERISA and DOL compliance standards. They draft the plan's legal document and furnish accompanying legal participant notices. Additionally, they assist with routine administrative duties such as processing participant rollovers and distributions, preparation of annual 5500 tax filings and annual compliance testing. Some TPAs also offer enhanced fiduciary services, which can help plan sponsors better-insulate themselves from litigious risks. A plan can enlist TPA services in one of two ways: by "bundling" them with the record keeper or by "unbundling" the plan and using a separate, independent TPA. Unbundling the plan can be more costly than bundling, however there are many circumstances where this arrangement makes great sense. TPA fees are typically charged as an annual base fee plus per-participant fees. It is less common to see a TPA charging an asset-based fee.
3. Advisory/Fiduciary Fees
Advisory fees compensate the plan's financial advisor for sitting on the same side of the table as the plan sponsor. Plan advisors should formalize the plan sponsor's decision-making process by facilitating standard protocols and performing routine plan reviews. Plan reviews should be no less than annually and should include cost benchmarking, plan design consulting, oversight of participant wellness programs, fiduciary standards updates and investment selection and performance reporting. Processes and reviews should be well-documented and readily accessible in case a lawsuit occurs or the DOL performs a surprise audit. If participants are paying a plan advisor and the plan is not receiving this level of service, the plan sponsor is not being a good steward of employee retirement accounts. It is important to note that not all plan advisors are held to the same ethical standards. If the advisor is licensed as a "broker" and not licensed as a "fiduciary", the definitions of care are not as stringent. Most plan advisor fiduciaries charge a transparent asset-based fee determined by the plan's total balance or they assess a hard-dollar charge. Brokers are often paid by commissions from the investments which are offered to plan participants.
4. Average Investment Expenses
The investment expenses are taken by the asset-managers, or fund companies, participants may choose to invest in. Plan sponsors may elect to pay record keeping, TPA and advisory costs to receive a corporate tax-deduction, however investment expenses must always be paid by participants. "Active" investment funds typically have higher fees because investors are paying a fund manager to attempt to outsmart the overall market. Additionally, they have higher management costs due to more frequent trading inside of the fund. "Passive" index funds typically have lower fees. This is because they are designed to mirror the overall stock or bond market performance and they simply invest in the same companies the market indices hold. When employees receive their retirement plan statements the returns reported are considered "net of fees", meaning the fees were already deducted from investment returns. A 2016 study by Morningstar revealed that fees are the greatest predictor of investment performance [2]. Therefore, the industry has seen an increase in flows into index funds. At any rate it is important to make sure the investment managers offered to plan participants have internal expenses that are in line with their industry peers.
Employees are entitled to proper due diligence.
Performing retirement plan benchmarking can be a difficult and cumbersome task for someone who is not well-versed in the business retirement plans space. For instance, service offerings differ from one provider to another and they change frequently. As previously noted, service providers slice and dice fees in varied ways. Knowing the right questions to ask and how to differentiate the actual value received from one provider to another requires constant engagement in the retirement plans industry. Plan sponsors should demonstrate they have properly researched the best options without conflicts of interest and provider bias. Therefore, relying solely on your current providers to benchmark your plan is not adequate.
Whether you opt to enlist the services of a plan advisor or not, it is a best practice to take your plan to market at least every three years to benchmark overall plan costs. While cheapest is not always best, you need to ensure your employees are receiving the best value from the providers they are paying. If you are sleeping on the job, particularly at a time like this, it can have irrevocable, long-term consequences to their financial futures. An introductory comprehensive analysis by RISE Consulting is complimentary and requires very minimal effort from the plan sponsor. Contact us today to learn more about how we can help you and your employees have the best chance at securing retirement.
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[1] Seven Ways the COVID-19 Pandemic Could Undermine Retirement Security. Urban Institute, 2020. https://www.urban.org/urban-wire/seven-ways-covid-19-pandemic-could-undermine-retirement-security
[2] The Predictive Power of Fees. Morningstar, 2016. https://www.morningstar.com/articles/752485/fund-fees-predict-future-success-or-failure
Disclaimer and Liability Limitations: Every effort has been made to provide you with the most accurate and current information on this subject matter as possible. The information provided should not be relied upon as the final source, since the information may have changed prior to time of use. The contents of this document are not intended to provide legal advice, nor is RISE Consulting, LLC engaged in rendering legal advice. If legal advice is required, the services of a legal professional should be sought. RISE Consulting, LLC, has endeavored to ensure accurate information has been conveyed in this employment tool and is not liable for any error or omission, or for any legal claims or damages that are beyond its control or are the result of actions for which it is not directly involved. Advisory services are offered by RISE Consulting, LLC, a Registered Investment Advisor in the States of Kansas and Missouri. Insurance services are offered by RISE Agency, LLC. RISE Consulting, LLC and RISE Agency, LLC are not affiliated with or endorsed by the Social Security Administration or any government agency and are not engaged in the practice of law.
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