Fee Review Methodologies –Should Your Plan Engage in Fee Leveling?

James EllisSenior Consultant

Arnerich Massena, Inc.

Issues With Paying Plan Fees• Revenue Sharing

– Standard method of the past– Leads to unequal distribution of fees

• Some participants pay more than others• Some pay none at all

• Fee Leveling– Becoming more popular– Flat-fee per participant– Alleviates “lumpy” fee distribution amongst participants

Goals of Today’s Discussion• Overview of fee leveling

– Fiduciary concerns?– How does this work from record keeper perspective?– Pros and cons in comparison to revenue sharing?

• Implementation examples– Flat fee versus asset-based fee?– Participant feedback?

Audience Question 1Please participate by a show of hands

How often do you review plan fees, namely record keeping fees?

1. One year2. Three years3. Five years4. Other

Audience Question 2Please participate by a show of hands

Plan Sponsors and Consultants Which of the following methods do you use in your Plan or Plans?

1. Fee Leveling2. Revenue Sharing

Audience Question 3Please participate by a show of hands

For those Plan Sponsors paying fees via fee leveling – which methodology do you use?

1. Asset-based fee2. Flat, per participant fee3. Hybrid Approach (Mix of flat fee + asset-based fee)

Marla KreindlerPartner

Morgan, Lewis & Bockius LLP

ERISA and Fee and Expense Compliance

• Consider ERISA prudence and exclusive benefit rule fiduciary duties

• Consider ERISA prohibited transaction rules and exemptions that apply, such as 408(b)(2)

• Consider DOL 404(a)(5) participant fee disclosure rules

• Consider ERISA fiduciary rule to follow written plan document

IN PLAIN ENGLISH:

• No specific ERISA prohibitions against revenue sharing

• No one type of fee arrangement is dictated by ERISA

• ERISA provides flexibility with appropriate consideration and diligence

• Procedural prudence (process) is paramount. Close attention to interplay of applicable laws, governing documents, participant communications and records is advised

Claims/Issues Raised in the “Plan Sponsor” Excessive Fee Cases

• Excessive Investment Fund Fees:– Selecting retail-share class funds vs. less expensive institutional-share class funds– Selecting actively-managed funds vs. less expensive, better performing index funds– Failing to consider separate accounts or commingled trusts

• Excessive Administrative/Record Keeping Fees: – Failing to negotiate (through RFP or otherwise) reasonable fees – Allowing asset-based, rather than per-capita, fees

• Revenue Sharing: The intersection of the above theories– “Hidden” revenue sharing– Excessive or conflict-driven revenue sharing– Failure to track total revenue sharing or obtain rebates back to the plan

Potential Risk Factors• Separate accounts or collective trusts vs. mutual funds• Institutional share class vs. retail share class • Index/passively-managed funds vs. actively-managed funds• Proprietary investments (of plan sponsor/fiduciary or record keeper) vs. open platform• Number of investment options• Number of record keepers• Use of revenue sharing without caps or rebates to the plan• Are fiduciaries getting competitive bids for record keeping? • Offering of and/or heavy investment in investments with high expense ratios• Plan asset size• Industry segment

Gay Lynn BathDirector of Retirement Plans Management

University of Oregon

Plan Structures

• 401(a) and 403(b) Plans• Three record keepers• $2 billion in assets• 18,000 separate accounts• Two legacy plans• 14 frozen 403(b) plans

Fee structures• Fidelity – moved from 100% revenue share to flat fee for

record keeping and administrative costs• VALIC – Added mutual funds and negotiated asset based fees

to those funds. Revenue share is still covering admin fees from annuities

• TIAA – negotiated new record keeping fee; admin fees are from revenue share. Working towards new contract and new fee structure

• Revenue share – goes back to participants on pro-rata basis

Keith OverlyExecutive Director

Ohio Deferred Compensation

Ohio Deferred Compensation

• 457 Plan• 212,000 participants • $14.5 billion in assets• Internal record keeping

Pre-Fee Leveling

• Six funds with revenue sharing• Revenue sharing range: 0 to 25 bps• Plan revenue: 53% revenue sharing;

47% asset-based fee

Process

• Multiple sessions with Board over two years• Multiple pricing models reviewed• Adopted new fee structure• Participant communication plan• Modified record keeping system and

participant statements

Outcomes• Explicit asset-based fee/small account

waiver/large account cap• Eliminated most revenue sharing arrangements• Rebate remaining revenue sharing• Fee transparency• Fee Policy Statement

Nathan VorisManaging Director, Business StrategySchwab Retirement Plan Services

Your Record Keeping Partner Should:

• Be agnostic to how you pay for the plan

• Provide decision support through data and consulting

• Execute

• Assist with communicating in an appropriate and understandable fashion

Things to think about• Not all fee leveling is equal – know the methodology and

the version of “fairness” you are aiming for

• Consistency will help record keepers

• Don’t forget about forfeiture policy

• Where do you draw the line – is à la carte the future?

An Example of an ERISA Fee Review• Study existing fee and expense arrangements• Consider fee arrangements against plan mission and objectives• Refresh on ERISA rules and requirements• Review plan documents, policies and procedures for

responsible parties and fee and expense provisions such as plan and trust agreements, investment policy, fee and expense policy

An Example of an ERISA Fee Review• Review participant communications for fee disclosures, including SPD, fund fact

sheets, 404a-5 fee disclosures, and other pertinent communications• Consider alternatives available, taking into account:

Internal resources Consulting / legal advice Record keepers and other providers Peers ERISA litigation

• Review against plan governance structure, as applicable• Consider incorporating RFI/RFP process• Document decisions made• Negotiate updated agreements• Update documentation and communications

Slide Number 1Slide Number 2Slide Number 3Issues With Paying Plan FeesGoals of Today’s DiscussionAudience Question 1�Please participate by a show of handsAudience Question 2�Please participate by a show of handsAudience Question 3�Please participate by a show of handsSlide Number 9ERISA and Fee and Expense ComplianceIN PLAIN ENGLISH:Claims/Issues Raised in the “Plan Sponsor” Excessive Fee CasesPotential Risk FactorsSlide Number 14Plan StructuresFee structuresSlide Number 17Ohio Deferred CompensationPre-Fee LevelingProcessOutcomesSlide Number 22Your Record Keeping Partner Should:Things to think aboutSlide Number 25An Example of an ERISA Fee ReviewAn Example of an ERISA Fee ReviewSlide Number 28