Understanding Plan Fees, With Help from NAGDCA

The National Association of Government Defined Contribution Administrators published a fee guide for public sector defined contribution plans Tuesday. Understanding and negotiating reasonable fees is a fiduciary duty to participants in a retirement plan, according to the guide.

The guide lays out all the services and related fees a DC plan might encounter and explains the pros and cons of the various services and fee structures available to sponsors. The guide breaks fee structures into three main service categories: recordkeeping, asset management and advising.

Recordkeeping

To reduce recordkeeping expenses, the NAGDCA guide recommended providing turnover estimates to the recordkeeper so it can make estimates of their own about new enrollees, thereby helping to reduce fees and increase fee predictability. The guide also recommended that sponsors consider including in their investment menus proprietary funds provided by the recordkeeper, if offered, since this can also drive fees down.

The guide cautioned, however, that most plans offer open investment menus to avoid the appearance of a conflict of interest, and any fund chosen for inclusion in an investment menu must be a prudent choice, whether offered by the recordkeeper or not. Additionally, a recordkeeper may terminate a fund as part of its business strategy, which can complicate the budgeting of a sponsor that was relying on that fund to keep fee costs down.

Recordkeeping fees can be structured in different ways. The guide explained that an asset-based structure, one tied to the value of the assets in an account, is the most common and can be beneficial for smaller plans. Plans can also negotiate “break points,” where the fee-to-asset ratio declines as the plan grows.

Other fee models can be based on average participant balance or an explicit direct dollar fee from participant accounts. An explicit fee can be helpful due to its transparent and easy-to-communicate nature, according to the guide.

Asset Management

Asset management fees “are added to mutual fund share classes intended to offset marketing and distribution related expenses,” according to the guide.

Asset management fees can also cover annuitization options, changes in asset allocation, management or a self-directed brokerage option.

Asset-based and revenue-sharing are the most common fee structures for asset management. Asset-based fees are charged as a percent of assets under management. Revenue-sharing fees are paid by a mutual fund company to a recordkeeper for assuming some of the administrative burden.

Advising

Advising fees can be assessed for investment advice, participant education and outreach, and other consulting services.

The guide recommended asset-based fee structures for smaller plans but noted that this can create fee volatility if the sponsor has high turnover or if market conditions are volatile. Sponsors using an asset-based model should budget accordingly. A “flat dollar” model in which a set price is paid for particular services may be more beneficial for sponsors who are larger or less risk tolerant.

NAGDCA noted that advisers providing educational services to participants may also be licensed to sell investment products such as annuities. The guide recommended that sponsors closely monitor this and require advisers to disclose these activities with the plan: “Plan fiduciaries should discuss cross-selling policies and seek to implement restrictions to cross-selling, when appropriate.”

Across all fee classes, the guide noted that customization will increase fees. Managers, consultants and recordkeepers often make use of templates and other standard models, and deviations from these models to satisfy specific plan needs can make fees increase and may not be in the best interest of the plan. According to the guide, “Plan characteristics can lead to vastly different fees and structures for plans with similar baseline demographics, such as the same asset level and number of participants.”