What you need to know about fee levelization trends

Trends come and go. Sometimes they last, and sometimes they are short lived. In the retirement plan industry, sometimes we see trends that apply across all plan types, and sometimes we see trends that only apply with a narrow focus. A particular trend today is to look at how administrative fees are allocated to participants in a defined contribution retirement plan. While the status of the DOL fiduciary rule is up in the air, the rule has triggered a great deal of thought as to the level of fees paid by a retirement plan and how those fees are allocated. In fact, regarding 401(k) plans, some advisors are pushing for zero revenue investment options (investment options that only contain fees for investment management and do not contain a component of fee that can be used by the plan sponsor toward administrative services). Others are looking at fee levelization methods that take revenue sharing (fee amounts, if available, from an investment product credited toward the plan’s administrative expenses), and apply amounts available on some basis that provides more of a level administrative fee to all plan participants.

One Size Doesn’t Fit All

It is important to note such levelization methods are not required, and aren’t specifically called out in any regulation. Nor is there anything inherently wrong with this sort of approach. Like anything, it isn’t a one size fits all best practice. Some plan fiduciaries and their advisors will find these methods prudent, and others will want to stick with traditional revenue sharing methodology.

New survey sheds light on 403(b) fee structure

For 403(b) plans specifically, the recent Plan Sponsor Council of America snapshot survey on Fee Structure and Evaluation in 403(b) Plans1 sheds some interesting light on the topic.

First of all, it is worth noting two-thirds of survey respondents use both annuities and mutual funds in their plans. That is important because many annuities do not have the same level of fee flexibility found in mutual funds, where different share classes can be used that provide different levels of revenue sharing. An additional 21% use annuities exclusively. Given the lack of fee flexibility in most annuities, this makes zero revenue or fee levelization largely unfeasible for 403(b) plans. This can also be seen in the survey, as only about a quarter of respondents are familiar with fee levelization, and only about 14% of respondents are considering zero revenue options. Not surprisingly, most respondents familiar with fee levelization or considering a zero revenue sharing fee structure are found among the larger plans.

Opportunities with Fee Policy Statements

Despite less flexibility in 403(b), there is still opportunity. Given the overall fiduciary trend, a sub trend has been to develop a fee policy and policy statement. About half of large plans over 1,000 participants have formal written fee policy statements, whereas only 14% of small plans less than 50 participants have one. Overall, over 20% of the respondent group was unaware of fee policy statements. A fee policy statement, very much like an investment policy statement, is a written document that expresses the plan’s philosophy on fees, objectives, and process for review. It seems that in this day and age of extreme litigiousness, that developing and following such a policy could go a long way to helping protect a fiduciary, especially given this is an area where contract structure can be significantly different for 403(b) versus 401(k) plans. In fact, I’d go as far as to say that developing and implementing a fee policy statement would be a best practice, and that is a trend that we can all encourage.

1 Plan Sponsor Council of America snapshot survey on Fee Structure and Evaluation in 403(b) Plans

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