Broker Check

Understanding Fees and Avoiding Fee-based Litigation


There are many different fees presented in Defined Contribution (DC) plans and may include investment management fees, management fees, administrative fees, revenue sharing fees and more. It is imperative that plan sponsors are aware of the various fees charged to either participants or plan sponsors. These fees can be charged as asset-based, dollar-based or a combination of the two. Plan sponsors can develop a written fee policy and monitor the plans regularly for fee compliance.

Fees have generally declined over the past decade and the use of a plan expense reimbursement allowance has increased over the same period. For instance, the use of plan assets to pay for appropriate plan expenses has increased to 58 percent of plans in 2015, up from 20 percent in 2006.¹

Many, but not all, mutual funds have revenue sharing built into the expense structure of the fund. These revenue sharing arrangements are often called 12b-1 distribution fees, sub-transfer agent fees (sub TA fees), servicing fees and commissions. The most common are 12b-1 and sub-TA fees.

All plans usually have a cost to administer by the plan sponsor and it is considered appropriate for plan assets to pay for appropriate plan expenses. There are various ways to collect funds for these expenses including:

1) using revenue sharing to offset expenses;

2) zero expense revenue investment lineup and an explicit administrative asset charge; and

3) lowest all-in fee approach. With the lowest all-in fee approach, plan sponsors need to make sure that any revenue generated be credited back to the participant invested in the fund.

Fee levelization has become a popular way to equalize the fees paid for plan administration between participants. There are also three methods of fee levelization:

1) revenue rebating where the recordkeeper collects all revenue sharing and periodically rebates it back to the participant invested in the fund;

2) partial revenue offsetting where revenue sharing is collected up to a point. In the event the revenue does not satisfy the plan revenue requirement, the participant invested in the fund will be charged a wrap fee;

3) full revenue offsetting is identical to the partial revenue offsetting with any excess revenue credited back to the participant invested in the fund.

The method by which participants are charged these administrative fees are either an asset based pro-rata charge, a fixed dollar participant charge or a combination of the two. Plan sponsors should consider the pro-rata method so as to not significantly disadvantage participants with lower balances.

The most common types of lawsuits are excessive recordkeeping or investment fees in the lineup. The key themes in most of these lawsuits are requirements in ERISA (which many times are considered best practice), however governmental plans are exempt from this requirement. Duty of loyalty, duty of prudence and prohibited transactions lead the lawsuit themes. The steps to address these lawsuit concerns generally are to follow best practices. While governmental plan sponsors are exempt from ERISA, most state laws address these issues and many have taken language straight from ERISA.

The case study of the Sanitation Districts of Los Angeles County discussed the 457(b) plan with approximately $292 million in assets for the employees and retirees of 24 separate legal districts in 78 cities around the L.A. area. They moved to one provider and an open architecture structure in 1996 and conduct an RFP on the plan every five years. They have an explicit fee disclosure, a quarterly asset-based fee charged with no cap. The portfolio is made up of publicly traded mutual funds with institutional share classes. A year prior to retirement, their provider has a certified financial planner (CFP) meet with them to discuss the features of the plan after they separate from service.

¹NAGDCA 2017 Annual Conference.

Last reviewed 6/1/2022

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