Are Your Participants Experiencing a Fee Imbalance? Subsequent to the 2012 implementation of ERISA fee reporting regulations (ERISA 408(b)(2) & 404(a)(5)), the Department of Labor (DOL) began to consider the appropriateness of the allocation of plan fees among participants. This is a subject that generally had not been on the radar screen of many plan fiduciaries, but once identified, tends to generate considerable traction due to its obvious validity. Ironically, advisors’ diligent attention to obtaining the lowest accessible share class for new funds in plan menus has contributed to this fee imbalance among a plan’s participants. Fred Reish, a partner with Drinker Biddle in the Los Angeles office has weighed in on this issue by stating, “While there are no requirements to charge equitable fees, in Field Assistance Bulletin (FAB) 2003-03, the Department of Labor (DOL) indicated that allocating plan expenses is a fiduciary decision that requires fiduciaries to act prudently… Whatever allocation method is used, failure by fiduciaries to engage in a prudent process to consider an equitable method of allocation of plan costs and revenue sharing would be imprudent and a breach of fiduciary duty.” While ERISA does not prohibit the passing on of reasonable plan fees to participants, others concur with Reish that having a process to consider how fees are charged to each participant is a best practice sponsors need to consider. Most plans contain funds in their menu that include fee ingredients, such as various revenue-sharing payments, that can contribute to participant fee imbalance. While there are some investments that do not offer a share class that has zero revenue sharing, many do. The simplest way to solve for the fee imbalance is by eliminating this fee ingredient altogether, wherever possible. But, this typically generates a revenue loss to your plan’s recordkeeper that needs to be recovered in some form. This revenue loss can be offset with an alternative, and more levelized form of revenue recovery, such as a fixed dollar quarterly participant fee (which is the ultimate in simplistic fee transparency), or an asset wrap fee (fees can increase as assets grow) or some combination of both.
Combining both the quarterly fixed fee and
asset wrap fee becomes of interest to plan fiduciaries when they realize that the fixed fee approach advantages the high account balance participant and the asset wrap approach advantages the low account balance participant. Some plans having an ERISA budget account established can remit revenue- sharing fees back to this account. Another method is for the provider to issue fee credits to participant accounts to achieve fee levelization. Many plans have not yet addressed participant fee levelization. Some reasons for this are lack of awareness on the part of advisors or plan fiduciaries, recordkeeper system limitations, and imperfect current solutions. Most industry people believe that participant fee levelization will eventually become ubiquitous as recordkeeper systems are adapted. Fee levelization is a difficult concept to refute as it logically makes sense and ignoring this issue may potentially lead to fiduciary liability concerns. Most providers have been working on options that can remediate fee levelization concerns to some extent, if not fully. At this time, a prudent approach for advisors and plan fiduciaries is to investigate the appropriateness of current fee allocation structure among plan participants, consider opportunities to approach fee levelization with your current
providers, and document the consideration process and conclusions. Participant Corner: Financial Wellness Series—Part 6: Your Retirement Date
This month’s employee memo is the sixth of our seven-part series on financial wellness and provides information on
what to expect during retirement. Download the memo from your Fiduciary Briefcase at fiduciarybriefcase.com. Retirement can be the most wonderful time of your life, truly the golden years. It is up to you to do what you can to make
it so. Enjoying good health in retirement is key to quality of life. The other major determiner of quality of life in retirement
is financial security. Below are some important questions that are never too early to consider. When is your retirement date?
Life expectancy is constantly being extended by medical advances and lifestyle decisions. Working until age 70 is not a farfetched concept. Many people will be quite physically and mentally capable of sustaining some degree of employment through their 80s, whether for financial reasons or simply because they enjoy the engagement. What will your expenses be?
Expenses are difficult to estimate. Having your own home is very helpful, but trying to predict other expenses is a challenge. The retirement investing industry has relied on the “old saw” that you should plan to replace 75 percent of your pre-retirement income. That may have worked for your parents, but likely not so much for you. If you retire with some degree of financial comfort you will have much time on your hands to indulge in your interests and hobbies. Don’t worry that you might save too much for retirement, because there is no such thing as too much money. There are many worthy causes you can help, if you have excess assets. What about working longer?
In some ways work is like school or military duty (during peaceful times), you can’t wait until you are done with it, but then in hindsight, you miss aspects of it. This is not to say you should remain working 40 hours a week, but you may consider part-time work in your current field or begin a new career that is of interest to you, perhaps this may be associated with a hobby or sport you enjoy, or some charitable institution you feel strongly about. There really are many options. What about Social Security?
In spite of all the Social Security kerfuffle about it being bankrupt, it is likely to still be here when you need it. For every year past eligibility you wait to begin benefits, your monthly amount increases by approximately 8 percent. That is not a bad return for a safe investment. You can delay your benefit until it makes sense not to. Also, consider a potential spouse’s benefit as well. Securities and investment advisory services offered through KMS Financial Services, Inc.