One of the things I enjoy about my role is regularly interacting with retirement plan advisors and plan sponsors. Over the last few years, I’ve talked to hundreds of you about a variety of possible products, services and solutions, including fee levelization related to revenue sharing (a.k.a. fee equalization).
In all of our conversations, one common theme keeps emerging – participant reaction. Many of you raise good questions and concerns about how your 401(k) and/or403(b) participants might respond to fee levelization. Since I talk about it often, I want to dig into this a bit more. That way you’re in a better position to make fee-related decisions around the organization’s retirement plan and, more importantly, help meet the related fiduciary responsibilities.
Misconception: Participants won’t like it
If you’re considering levelizing the organization’s plan administrative fees, but concerned about your participants’ reaction, you’re not alone. Nearly every plan sponsor or plan committee we work with talks through this concern at some point or another. But the good news is there’s usually little reason for concern.
According to a recent survey, 6 in 10 participants don’t know what fees they pay or say (believe) their employer pays all of the fees. That’s a red flag in and of itself if you ask me. It can also be a reason some plan sponsors implement fee levelization — they believe fees become more transparent to participants. That’s not necessarily true, but the perception is there.
Along that same line, there are opinions out there that fee levelization can negatively impact plan participation, savings rates, etc. To understand this better, we recently looked at participants in retirement plans where we provide services. By analyzing three major savings factors — participation, deferral and account balance — we determined plan administrative fee levelization has not negatively impacted participant actions (see illustration below).
I’d say fee equalization hasn’t hurt plan these plan dynamics, but does it raise more questions and concerns from participants? Based on what we’ve heard from our clients, I’d say no. It really seems to be a non-issue at the end of the day. Here’s what one of our clients told us…
“We had a lot of discussion around exactly how this (fee levelization) was going to work. How do we communicate to participants? Will they understand? This is where we spent most of our time,” said Michelle Levy, compensation and benefits manager for Access Intelligence. “Our biggest surprise during implementation was that we only had a few questions from our participants.”
Address concerns up front
If plan sponsors equalize plan administrative fees, participants should be informed of the change and understand it. Ease into the transition through effective communication by considering the following:
- Remind participants how retirement plans work and the benefits.
- Explain retirement plan administrative fees.
- Break down fee types — investment expense, plan administrative fees and participant transaction fees.
- Describe what’s changing and show how to find fee information.
One approach that seems to work well is to hold educational meetings for employees. Help them understand the benefits of a retirement plan, why they should care and what’s changing. This non-branded participant-facing presentation may be a good place to start.
With a better understanding and more transparency around fees, participants may actually make more well-informed decisions about their savings.
Get educated … get the facts
Take time to fully understand fee levelization and get the facts. Our recent white paper covering what fiduciaries need to know can help. Then consider taking these steps:
- Gather and evaluate relevant facts, including participant needs
- Assess available fee payment methods and determine how fees will be collected
- Document, document, document. Use a fee policy statement for help.
 The Cerulli Report: U.S. Evolution of the Retirement Investor 2016 (page 84).
 Principal block analysis as of June 30, 2017, Principal 2017. Based on sample of 981,695 participants in plans using fee levelization.
 Plansponsor DC Benchmarking survey, February 2017.
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.
Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, Iowa 50392.
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