February 21, 2019

Should Your Plan Engage in Fee Leveling?

Are participants paying their fair share of your plan’s recordkeeping and administrative fees? It may not be apparent, but the way some plans are structured, one participant may be paying far more in plan fees than another. A lack of transparency around fees for services provided can make this topic complex and lead to problems for fiduciaries, who often aren’t even aware of unfair fee practices. How can plan sponsors make sure fees are distributed evenly across your participants? Consider a process called “fee leveling,” which we consider a best practice for retirement plans.

What is fee leveling and why is it necessary?

Fee leveling is the process of reducing or eliminating revenue share and applying a more transparent, equitable fee application to all participants.

Some funds offer revenue share as a component of their expense ratio, returning some of the investment fee back to the plan sponsor. Many plans have traditionally used revenue sharing to offset recordkeeping costs, but since the amount of revenue share varies by fund, this can lead to instances in which some participants pay more than others for plan fees.

For instance, consider a plan that includes index funds, which don’t typically include any revenue share, and a suite of target-date funds that do include revenue sharing. Those participants invested in the target-date funds will end up paying a greater proportion of recordkeeping expenses than participants invested only in index funds. Brokerage windows almost never have a revenue sharing component, leading to further inequalities of fee distribution.  These disparities can result in an inequitable distribution of fees, raising fiduciary issues. To alleviate this issue, alternative methods of paying for services should be considered.

How can plan fees be distributed

Fee leveling is a solution to the problem and may be implemented in a variety of ways. Instead of using revenue sharing to pay for recordkeeping fees, sponsors can:

•    Assess a flat fee to all participants

•    Charge an asset-based fee to all participants

•    Create a hybrid that includes a flat fee and asset-based component

Most major recordkeeping platforms are able to accommodate these methods and are willing to work with plan sponsors to find the best method for their plan.

Conduct a fee review and analysis first

Before making a change, plan sponsors should analyze the current fee structure and determine what makes sense for their employee demographic. For example, in a plan with high average account balances, a flat fee may be the most equitable. But a flat fee may seem burdensome for participants with lower balances, so in a plan with a wider disparity and/or a large number of lower account balances, an asset-based fee or hybrid approach may make more sense. Ultimately, your committee should focus on establishing a prudent process around treatment of plan costs and how they will be applied. Engaging in fee leveling can help you address a major fiduciary concern and provide a more transparent and equitable means to cover plan costs, which ultimately benefits all your participants.

Review and monitor your fees

Keep in mind that fiduciaries have a responsibility to monitor fees overall, something we are all reminded of when we see excessive fee lawsuits splashed across the media. Ideally, plan sponsors should review recordkeeping and investment management costs annually and test the market every three years or so to remain competitive in terms of pricing and services. Remember that there’s no requirement that your fees be the lowest, just that they be reasonable. Focus on ensuring that you and your participants are receiving appropriate value for the expenses you are paying.