PLANSPONSOR - June/July 2019 - 18

Reviewing Fee Allocation
Federal laws and regulations give plan sponsors substantial
leeway in how plan fees get paid. The 2018 PLANSPONSOR
Defined Contribution (DC) Survey: Plan Benchmarking illustrates
the widely varied choices sponsors have made. Sixty-six
percent of respondents said their plan and/or participants pay
investment management fees, while 20.4% said their employer
pays them, and 13.6% said participants and the employer share
the expense. Asked about investment consulting fees, 48%
said their plan and/or participants pay, while 41.1% said their
employer pays, and 10.9% share the expense. And, for recordkeeping
fees, 49.9% said the plan and/or participants pick up
the cost, while 35.8% said their employer does, and 14.2%, their
employer and participants share it.
It is important to know what federal laws and regulations say
about the plan expenses an employer may pass along. " We make
sure that sponsors understand what expenses can be paid by
participants and what expenses can't, " says David Griffin, founder
and director - institutional retirement plans at Atlanta Retirement
Partners, Small Team winner for the 2019 PLANSPONSOR
Retirement Plan Adviser of the Year. " Settlor expenses, which
confer a benefit to the plan sponsor, should always be paid by the
plan sponsor-period. They should never be paid by participants. "
That category includes costs, such as for adding discretionary plan
amendments, and expenses such as for fixing an operational error
via the IRS self-correction program.
Atlanta Retirement Partners has seen some employers
decide it makes strategic sense to now pick up more of the plan
costs, Griffin says. The intensely competitive hiring environment
in industries such as technology and management consulting has
motivated some employers to make policy changes as they hire
workers coming from larger companies. For instance, employees
accustomed to a mega-size 401(k) look for low costs and a rich plan
design in their new plan. To make comparably low fees possible if
their plan is much smaller, he says, some of these employers now
pay all or part of the plan's administrative costs.
" Most of the recordkeepers are now structured where an
employer can decide, 'I want to pay this fee, or I want participants
to pay this fee,' " Griffin says. " Most of our clients meet
somewhere in the middle: There are some instances where they
pay a fee and others where they've decided that participants will
pay the fee. " Among his firm's clients, he estimates, 70% share
administrative costs with participants; 25% pick up the full tab,
with participants paying only fund expenses; and 5% have opted
for participants to pay all administrative costs.
Dan Peluse, director of retirement plan services at Wintrust
Investments in Chicago, also has noticed an uptick in employers
rethinking their plan fee allocations. " Business owners have
considerable discretion over how much of the recordkeeping fee
and the advisory fee they'd like to pay, " says Peluse, an Individual
finalist for 2019 Retirement Plan Adviser of the Year. " In the
past year, we've had more conversations with sponsors about
18 PLANSPONSOR.com June - July 2019
fully or partially paying for recordkeeping and advisory fees.
" For some employers, their motivation for doing it is that it's
a business expense that is tax-deductible, " he says. " And others
believe that, if the employer pays administrative fees, it will help
minimize their fiduciary risk. "
Rethinking Revenue Sharing
Many sponsors lack a firm grasp on their plan's use of revenue
sharing. Asked if their plan includes mutual funds that pay
12b-1 and/or sub-transfer-agent (sub-TA) fees to recordkeepers or
third-party administrators (TPAs), 33.3% of sponsors said yes and
24.6% said no, according to the DC Survey: Plan Benchmarking.
However, plan sponsor responses most typically fell into the
" Unsure/Don't know " category, at 42.1%.
In some recent lawsuits, plaintiffs have tried, without
success, to show that using revenue sharing is a fiduciary breach
by plan sponsors, says attorney Carol Buckmann, co-founding
partner of Cohen & Buckmann P.C. in New York City. " Legally,
there is nothing wrong with the use of revenue sharing, if you
monitor it, " she says.
Sponsors should regularly review whether continued use
of revenue sharing works to participants' advantage on fees,
Buckmann says. " You need to look at the share class of your investments
and compare the net cost of the share class you're in with
other share classes, " she says. " If a fund ends up having a lower net
cost for participants because it pays revenue sharing that you use
to pay for the plan's administrative services, that's OK. You may
want to do revenue-sharing rebates to participants invested in that
fund if the payments exceed the cost of the services. "
Some sponsors decide to continue using certain funds that
pay revenue sharing, but the plan will refund those payments
to participants invested in the funds. " The first question for
sponsors is, 'Does this fund still make sense in the plan?' " says
Wendy Tyson, a consultant at Vanguard Strategic Retirement
Consulting in Valley Forge, Pennsylvania. " If the client decides
that it does, typically we'll see the sponsor decide to rebate the
revenue sharing back to the participants. "
Consultant Callan LLC's surveys have shown a decline in
the use of revenue sharing in recent years, says Jamie McAllister,
a senior vice president at the firm in Chicago. Plan sponsors'
increased desire for fee transparency plays a part. " If revenue
sharing is embedded in investment fees, participants don't have
a great line of sight on the administrative fee they're paying, "
she says. More than 90% of plans in the survey managed over
$100 million in assets.
Sponsors also have eliminated the use of revenue sharing
because they see it as inequitable for plan participants,
McAllister says. " Say a plan has 15 funds in the lineup and
half of them pay revenue sharing. If somebody is just in funds
that pay revenue sharing, that person is disproportionately
paying the administrative fees. But if a person is only in funds
that do not pay revenue sharing, that participant effectively isn't
http://www.plansponsordigital.com/plansponsor/june-july_2019/TrackLink.action?pageName=18&exitLink=http%3A%2F%2FPLANSPONSOR.com
PLANSPONSOR - June/July 2019

Table of Contents for the Digital Edition of PLANSPONSOR - June/July 2019
