The Markets August 15, 2018

Different Flavors of Fee Levelization

As one of the first steps of pursuing fee levelization, plan sponsors and advisers should consider whether participants will be charged on a “pro rata” or “per capita” model.
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The concept of fee levelization is garnering attention from defined contribution (DC) plan sponsors and advisers, commencing from such sources as the increased volume of litigation over plan costs and the Department of Labor’s Employee Benefit Security Administration’s (EBSA’s) focus on fee disclosures.

Michael Volo, senior partner at Cammack Retirement, explains, “With fee levelization the recordkeeper applies their recordkeeping fee as a percentage of assets, to each individual investment option. If revenue sharing in the investment option exceeds the recordkeeper’s required revenue, the recordkeeper credits each participant who has assets in the fund with the amount of the excess. If the investment provides less than the required revenue amount, the recordkeeper adds an additional fee, in the amount of the shortfall, to the accounts of each participant using the investment. A participant with several different investments might experience multiple credits and debits based on the revenue sharing in each investment, relative to the required revenue.”

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Some plan sponsors and retirement plan providers remain perplexed by fee levelization. A 2017 Plan Sponsor Council of America (PSCA) report on non-profit employers found almost half of survey respondents were unaware of fee levelization, while only one in four plan sponsors could verify if their plan employed revenue-sharing to pay costs. 

Still, 33% of sponsors say they have already taken steps to ensure that fees are assessed to participants in a more equitable manner, according to Aon Hewitt’s “2016 Hot Topics in Retirement and Financial Well-Being.”

Michael Sasso, partner and co-founder of Portfolio Evaluation, stressed that it is a plan sponsor’s duty to consider fee levelization, even more now as firms face an upsurge in lawsuits. As companies are sued left and right over fees, plan sponsors must consider not if, but when, potential litigation can occur should certain plan costs be deemed too high or inconsistent, he says.

“In order to better protect yourself and get ahead of it, it would be wise for companies to really look at this, study it, and do what’s best for them. Have a process in place and make sure it’s well-documented,” he says.

Plan sponsors need to question how revenue sharing payments are applied towards each participant, Sasso says. The practice of revenue-sharing occurs when an investment company or manager pays a portion of funds to the recordkeeper, to decrease administrative service costs instead of paying a brokerage cash expense. Because revenue sharing differs with certain investments, participants invested in certain funds could end up subsidizing costs for participants in other funds, Sasso points out. The unparticipating workers, he says, end up “riding on the coattails of participants in funds generating revenue sharing.”

Volo believes the trend in fee levelization tackles this revenue sharing gap, and improves the situation participants, plan sponsors and recordkeepers are put in when remunerating these costs.

“It addresses that disparity and allows for revenue sharing to go back to participants, allows the plan sponsor to select the funds with the lowest net investment fees, and again, it’s a progressive fee, consistent with how investment fees are charged,” he says.

How participants are charged for these fees, from fee levelization to revenue sharing, can depend on the recordkeeper as well. Recordkeepers levelize fees differently from one another, and since it is a complicated process, not all recordkeepers offer the service.  

Other fees

Other fees can be levelized as well. Plan sponsors and advisers should consider whether participants should be charged at a “pro rata” or “per capita” model, Sasso says. “Pro rata means participants will pay a percent on their account balance, while with ‘per capita’ expenses, participants are charged equal dollar amounts. For example, if a sponsor were to charge each participant an annual per capita fee, say $75, a participant with a $5,000 account balance would be paying 1.5% of their assets, whereas a person with a $500,000 account balance would be paying a mere 0.02%. A ‘pro rata’ 10 basis-point fee for a participant with a $500,000 balance would result in $500 in plan fees, whereas a participant with a $5,000 balance would only pay $5. According to Volo, most advisers would suggest a per capita approach, or apply pro rata fees along with revenue sharing fee leveling.

“When that fee methodology is adopted, it lifts constraints off of selecting funds to provide certain revenue sharing to pay for the recordkeeping expenses, because there’s an explicit fee for recordkeeping,” he says. “So, often it allows plan sponsors and advisers to choose low or no revenue sharing funds, to reduce investment expenses to participants.”

Volo say plan advisers can help plan sponsors with fee decisions by requesting both pro rata and per capita prices from recordkeepers.

Participant reaction to fee levelization

For those DC plan sponsors worrisome over participant reaction—and education—concerning fee levelization, Volo explains how incorporating a questions and answers (Q&A) forum or a frequently asked questions (FAQ) portal could mitigate confusion. Some participants may not give the subject any attention, but most, he says, will address the resource should distresses arise. It’s the plan sponsors making an emphasis on fee levelization, he says, that typically generates the need for educational materials.

“Those who are interested have strong communication material provided during the rollout of fee leveling, including FAQs to address any concerns that participants have,” he says.

Compliance August 8, 2018

Focusing 403(b) Plan Clients on Document Remedial Amendment Period

Both Employee Retirement Income Security Act (ERISA)-governed and non-ERISA 403(b) plan sponsors need to start working on any plan restatements now.
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The last day of the 403(b) plan remedial amendment period may seem far off, but it’s not, and both Employee Retirement Income Security Act (ERISA)-governed and non-ERISA 403(b) plan sponsors need to start working on any plan restatements now.

Grant Halvorsen, VP Retirement Plan Consulting at MRP, formerly Moreton Retirement Partners, in Salt Lake City, Utah, explains that when the final regulations were put into place in 2007, they stated that all 403(b) plan sponsors (other than certain church plan sponsors) had to adopt a written plan document no later than December 31, 2009—a new requirement for non-ERISA plans. However, he says, the Internal Revenue Service (IRS) did no offer a lot more guidance about what the document needed to say or include. “Plan sponsors made a good faith effort, with the comment of really being not sure if their documents comply with what the IRS wants,” Halvorsen says.

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In fact, the IRS indicated that the plan document requirement can be satisfied with a collection of documents, sometimes referred to as the “paper-clip” approach, with one centralized document and additional provisions found in a variety of documents, including underlying investment products, administrative and service agreements, procedures, and if applicable, state statutes and regulations.

In April 2013, the agency issued Revenue Procedure 2013-22 establishing a pre-approved plan program for 403(b)s and offered a remedial amendment period for 403(b) plan documents. The last day of the remedial amendment period for 403(b) plans is March 31, 2020.

What the remedial amendment period offers

Halvorsen explains that the remedial amendment period allows 403(b) plan sponsors to restate their plans to adopt one of the prototype or volume submitter plan documents pre-approved by the IRS, retroactively effective January 1, 2010. Plan sponsors may adopt these plans as restatements to correct any form defects in their written plans from January 1, 2010, to the end of the remedial amendment period.

In other words, says Deborah Grace, attorney at Dickinson Wright PLLC in Troy, Michigan, the remedial amendment cycle is a period of time in which the plan sponsor can go back and fix its plan document so it reflects how the plan has been operating.

Halvorsen notes that adopting a pre-approved document assures plan sponsors that their documents are correct in form. However, if they find they have operational errors—where the plan has not been administered according to terms of the document—those have to be corrected through the IRS’ Voluntary Correction Program (VCP) program, and plan sponsors still have to pay filing fees.

There are exceptions. Grace points out that the IRS is allowing for effective date addendums to 403(b) plan documents to allow plan sponsors to note any changes to plan administration that were made after the adoption of a written plan document. For example, Grace says, if a nonprofit adopted a 403(b) document effective January 1, 2009, and the document said the plan only accepts employee deferral contributions, but around 2015 the plan sponsor decided it would match employee deferrals and never amended its plan to reflect that, the IRS says if the plan sponsor had a good document in place at the end of 2009 and adopts a prototype as of March 31, 2020, it can add an amendment reflecting the effective date of the match with no penalty for not operating in accordance with the plan.

“That’s a key piece plan sponsors need to know—what they did with the plan between 2010 and the end of the remedial amendment period, and when any changes were effective,” she says.

To adopt or not to adopt

Neither Grace nor Halvorsen have come across a plan sponsor client that was previously using a paper-clip approach for their plan document and is having trouble fitting into a new IRS pre-approved plan document. However, Halvorsen suggests if that is the case, plan sponsors should amend their plan to fit into either a prototype or volume submitter pre-approved plan document. “A volume submitter plan document would be more flexible for paper-clipped plan documents and probably the best fit,” he says. “According to the IRS, as long as the document is ‘substantially similar’ to the volume submitter document, plan sponsors will have reliance that it complies in form to IRS regulations.”

From a practical standpoint, Grace says, plan sponsors rely on recordkeepers to partner with them to make sure the plan is operating correctly and assets are recordkept correctly, and recordkeepers prefer a pre-approved plan document—they’ve designed their systems to work with a pre-approved document. “If a plan sponsor has an individually designed plan document, it may be limited on which vendors it can use,” she says, “There’s no good reason not to adopt a pre-approved plan document.”

Grace adds that this plan restatement and remedial amendment period may provide a good incentive for non-ERISA plan sponsors, such as K-12 public schools, to consolidate vendors.

Both Grace and Halvorsen agree that if a 403(b) plan sponsor decides not to adopt a pre-approved plan document, it should turn to an attorney well-versed in the IRS regulations to review the plan document and provide a letter stating it complies. “Some may not be willing to do so, but it’s a good starting point,” Halvorsen says.

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