I’m starting to hear this question a lot. Which is great news because it means you’ve not only heard about the possible benefits of fee levelization, but you want to learn more. We’re certainly seeing a lot of interest in this topic among advisors, but now it’s time to help clients learn about it too.
In a recent study advisors told us “lack of awareness and understanding among plan sponsors” is their top concern (63%) about initiating conversations with clients; followed by “fear that sponsors won’t understand (fee levelization) benefits” (57%).
To help both advisors and plan sponsors stay informed, I’m going to be blogging regularly on this topic over the next six to nine months. We’ve got a lot to cover, so let’s get started…
What is fee levelization?
To understand fee levelization, you need to know how 401(k) or retirement plan administrative fees are collected and, particularly, how revenue sharing works. After all, fee levelization – or fee equalization – is a fee collection method that allows retirement plan fees (i.e., recordkeeping, plan services, compliance, etc.) to be shared equally among ALL participants with an account balance.
Many retirement plans today use a standard revenue sharing approach where employees with an account balance in the plan helps offset the administrative fees of the plan by paying fees through the specific investment options they choose. Unfortunately, these fees often vary by investment option, which means some participants end up paying a bigger percentage of the plan’s administrative fees than others.
Here’s an example…
Fee levelization simply splits the administrative fees for the retirement plan equally among all participants. Using the same data as above, here’s how this might look under a fee levelization approach…
Why fee levelization?
To get back to where I started, how do you know if it’s right for your organization? There are several reasons plan sponsors may want to learn more about fee levelization, but these are the ones we hear most:
- Manage fiduciary responsibility – plan sponsors rank compliance with regulations as a top concern. With heightened awareness of fiduciary duties, it’s important you have a thorough understanding of retirement plan fees and how those fees are paid.
- Share costs equally – most plan sponsors are supportive of splitting retirement plan administrative fees equally among all participants, especially when they find out their current plan isn’t doing this.
- Be as transparent as possible about fees – in today’s world, it’s all about being transparent. Fees taken directly from participant accounts are typically viewable on plan statements and web sites. Fee levelization may allow participants to easily find and see what they are paying for.
Interested in learning more about fee levelization and the various options that may exist? Make sure you understand your options to help you mitigate plan compliance risk. Then, you might want to take these next steps:
- Gather and evaluate relevant facts, including plan participant needs
- Access available fee payment methods and determine how fees will be collected
- Document, document, document. A fee policy statement may help.
Advisors, for more information and actionable tips, join me for our Nov. 1, 2017 fee levelization webinar.
 Fee Levelization Advisor Insights Study, July 2017
 Cogent Retirement Planscape, May 2016
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.
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