That’s a great question and one I get asked frequently. It’s relatively easy to understand once you know how retirement plan fees — or 401(k) plan administrative fees — are collected. So, let’s do a quick refresher on the basics of why and how fees are collected.
Why retirement plan administrative fees are collected
Retirement plan administrative fees are often used to cover activities performed by a plan service provider or recordkeeper. These fees typically pay for resources and services available to help plan participants enroll, review applicable plan information, calculate and take steps to help them reach their retirement savings goals. Resources include a call center, website and participant statement, for example.
How retirement plan administrative fees are collected
There’s a few ways to pay for retirement plan administrative fees. A popular method is called revenue sharing. This approach allows service providers, based on the plan sponsor’s election, to collect all or a portion of the plan administrative fees implicitly through the plan’s investment options (e.g., the investment options a participant selects — See What is Revenue Sharing below).
If this approach isn’t used or it doesn’t cover all of the plan administrative fees, fees can be billed directly to a plan sponsor or paid from participant accounts. These options include:
- Billed fees are typically paid by a plan sponsor and included in the plan sponsor’s annual budget. Fees are not allocated among participants and plan assets are not used.
- Deducted fees allow plan sponsors to have all or a portion of the plan administrative fees deducted explicitly from plan assets shown as a dollar amount. In the case of a defined contribution plan or 401(k) plan, these fees reduce the amount of retirement savings in participant accounts either in proportion to their account balance or as a flat dollar amount.
- Asset-based fees allow a plan sponsor to collect all or a portion of the plan administrative fees explicitly from participant accounts. This amount is generally determined by a basis point.
It’s important to note that these payment methods aren’t mutually exclusive. It’s not uncommon for plan sponsors to use some revenue sharing and some asset-based fees to cover total plan administrative fees.
What is revenue sharing?
Revenue sharing has been the most common fee allocation approach used in the industry today and is still used by many plans. It’s often a part of your investment options expense, and it’s automatically taken from a participant’s account and the investment options overall return reflect net of these fees. Revenue sharing can allow an organization to pay all or a portion of the plan administrative fees implicitly through payments received from the plan’s investment options.
Revenue sharing from certain investment options is often used to offset plan administrative fees on an investment-by-investment, account-by-account basis. Because of this, participants may pay for some or all of the recordkeeping or plan administrative fees through the investments that they select.
But, as the illustration so visually shows, the amount of revenue sharing can vary from one investment option to the next — meaning participants may pay different proportions of the plan’s administrative fees.
This has raised concerns among advisors and plan sponsors who want to level the playing field and allocate plan administrative fees equally among plan participants. As such, there’s a lot of buzz in the industry about levelizing fees — commonly called fee equalization or fee levelization. But that’s a topic for a future blog post.
How you can put revenue sharing to work for you
Interested in revenue sharing options or want to learn more? Make sure you understand all your options to help you meet your fiduciary responsibilities. Then, consider taking these next steps:
Plan sponsor actions
- Talk to your advisor and/or service provider about what you like/don’t like about how retirement plan fees are allocated within your organization’s plan today (e.g., Is the current model working for you? What concerns, if any, do you have?). This conversation can help you determine the fee allocation approach that best meets the needs of the plan and your participants.
- Initiate conversations with your plan sponsor clients. Walk them through the various options so they can determine what’s best for their situation.
- Document, document, document to help your clients monitor and mitigate potential fiduciary risk. Ask about using a fee policy statement.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
t17080708m2 | 8/2017 | PQ11486LL
 Deloitte Annual Defined Contribution Benchmarking Survey, August 2015.