plan fee levelization - going "back to the future"

Plan Fee Levelization - Going "Back to the Future"

2016

http://www.bfsg.com/

For Institutional Use Only

Hard Dollar / Explicit Fee Agreements

Mutual Fund Revenue Sharing

Multi Share Class Proliferation

“Free” Retirement Plan Administration

Lawsuits Challenging Revenue Sharing /

Excessive Fees

DOL Fee Disclosures

404(a)(5)

408(b)(2)

DOL Fiduciary Rule

“Conflict of Interest Rule”

Larger Plans move “Back to the Future”

Fee Levelization

Plan Fee Levelization - Going "Back to the Future"

2

Retirement

Plan Fees

have come full

circle


What Does ERISA Say?

Excerpt from Field Assistance Bulletin 2003-3 (May 19, 2003)

“…ERISA contains no provisions specifically addressing how plan expenses may be allocated

among participants and beneficiaries…”

“…When the plan documents are silent or ambiguous on this issue, fiduciaries must select the

method or methods for allocating plan expenses. A plan fiduciary must be prudent in the

selection of the method of allocation. Prudence in such instances would, at a minimum, require a

process by which the fiduciary weighs the competing interests of various classes of the plan’s

participants and the effects of various allocation methods on those interests. In addition to a

deliberative process, a fiduciary’s decision must satisfy the “solely in the interest of participants”

standard…”

3


Today’s Agenda

1. Introduction to Investment / Recordkeeping Fees

2. Allocation of Fees

3. Implementing Levelized Solutions

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Introduction to Investment / Recordkeeping Fees


Investment / Recordkeeping Fees An overview

The Expense Ratio is an annual fee charged by all mutual funds, separate accounts and ETFs. It is generally expressed as the

percentage of assets deducted each fiscal year for fund expenses, including management fees, operating costs, 12b-1 fees,

shareholder servicing fees, Sub-TA fees, and any other asset-based costs incurred by the fund.

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Fees charged by the fund management company for managing the

assets.

Charged as a percentage of the total invested assets and deducted

from the investment return.

Investment Management Fees

Fees charged on total invested assets and deducted from the

investment return by the fund management company.

Includes commissions to brokers, marketing expenses and other

administrative services.

12b-1 Fees



Revenue sharing is deducted from fund assets by the fund

management company and shared with the service provider.

Shareholder Servicing Fees



Brokerage firms and mutual funds often contract recordkeeping and

other services to a third party called a sub-transfer agent.

Sub-TA (Agency Transfer Fees)

Additional fees charged on Plan-specific assets and deducted from the

investment return by the service provider.

This fee is in addition to the Expense Ratio.

Asset / Wrap Fees

Investment/Fund

Management Fees

12b-1 Fees

Shareholder

Servicing Fees

Sub-TA (Agency

Transfer Fees)


Investment / Recordkeeping Fees The most common fees

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Investment/Fund

Management Fees

Paid to Investment Managers

For managing assets

Revenue Sharing

Paid to Recordkeeper

To offset Plan-related Fees

Investment/Fund

Management Fees

Revenue Sharing

The Full “Net” Expense Ratio*

What participants/investors pay

*The net expense ratio may also include additional fees, such “wrap” and other servicing charges.

The revenue sharing

component is the primary focus

of the following pages.


Paying Retirement Plan Fees Putting it all together

Under the provisions of ERISA §404(a)(1)(A), Plan assets may be used to defray necessary

and reasonable plan expenses in the form of direct payments to designated plan service

providers.

Recordkeepers have typically been compensated through:

o payments received directly from the plan (e.g. a fee charged to participant accounts on an annual

basis), and/or

o payments received from other sources, such as the plan’s investment options (revenue

sharing)

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Management Fees

• Paid to Investment Manager or

Sub-Advisor

Service Costs / Revenue Sharing

• 12b-1 Fees

• Sub-Transfer Agent Fees

• Shareholder Servicing Fees

Paid by Participants

1% Operating

Expense Ratio

(100 basis points)

Investment

Management Fees

65 basis points (0.65%)

Revenue Sharing

35 basis points (0.35%)

Example “Fund A”


Plan Fees – An Example

Assumptions:

The Plan is administered by ABC Recordkeeper with a Revenue Requirement of 5 basis

points (bps), or 0.05%.

We’re focused on 3 participants in the Plan: Jack, Jane, and Joe

All three have a balance of exactly $100,000

All three are currently invested in only one fund, and it is the same fund (but each using a different share

class – R4, R5, R6 – We recognize one Plan using 3 share classes is unlikely. This is a hypothetical

example to demonstrate a point.)

Therefore, each fund has a beginning balance of exactly $100,000.

For simplicity, all three fund’s have a “gross” return of 3%, with zero investment/fund management fees.

Therefore, the only fee is the revenue sharing portion of a normal expense ratio.

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Plan Fees Without Fee Levelization

Without Fee Levelization

Participants pay an uneven share of Plan expenses

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Jack

Jane

Joe

Investment

Option

Revenue

Sharing

Revenue

Requirement

Account

Credit/Debit

Actually

Paid*

Fund A 0.35 0.05 0.00 0.35

Fund B 0.05 0.05 0.00 0.05

Fund C 0.00 0.05 0.00 0.00

*There is also excess revenue placed into an expense account, which will impact the “actual” payment once

reallocated.


Plan Fees With Fee Levelization

With Fee Levelization

Through a revenue sharing adjustment, all participants pay an equal amount of Plan expenses

11

Jack

Jane

Joe

Investment

Option

Revenue

Sharing

Revenue

Requirement

Account

Credit/Debit

Actually

Paid*

Fund A 0.35 0.05 + 0.30 0.05

Fund B 0.05 0.05 0.00 0.05

Fund C 0.00 0.05 - 0.05 0.05

*There is no excess to the Expense Account unless the Plan Sponsor decides to add an additional amount

to the “levelized” fee.


Levelizing

Adjustment

Initially

Paid

PERA

Reallocation*

Actually

Paid

$300 $350 $0.00 $50

$0 $50 $0.00 $50

-$50 $0 $0.00 $50

$400 $0.00 $150

Levelizing

Adjustment

Initially

Paid

PERA

Reallocation*

Actually

Paid

$0 $350 $83.16 $267

$0 $50 $83.40 -$33

$0 $0 $83.44 -$83

$400 $250 $150

Plan Fees – An Example

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Initially shown on

participant statement

Shown on participant

statement after

PERA Reallocation

Everyone pays the

same amount!

Without Levelization

Gross Ending

Balance

Revenue

Sharing (%)

Revenue

Sharing ($)

Net Ending

Balance

Jack $103,000 0.35% $350 $102,650

Jane $103,000 0.05% $50 $102,950

Joe $103,000 0.00% $0 $103,000

Total $309,000 $400 $308,600

Revenue

Req. (%)

0.05%

0.05%

0.05%

$150

Actual Account

Ending Balance

$102,733

$103,033

$103,083

$308,850

With Levelization

Gross Ending

Balance

Revenue

Sharing (%)

Revenue

Sharing ($)

Net Ending

Balance

Revenue

Req. (%)

Jack $103,000 0.35% $350 $102,650 0.05%

Jane $103,000 0.05% $50 $102,950 0.05%

Joe $103,000 0.00% $0 $103,000 0.05%

Total $309,000 $400 $308,600 $150

Net Ending

Balance

$102,950

$102,950

$102,950

$308,850

*PERA Reallocation is assumed to be on a pro rata basis


Client Levelized Pricing Analysis

Investment Option% of Core

Plan Assets

Assets

9/30/2015

Guaranteed Income Fund 19.58% $27,256,129

Vanguard Institutional Index 10.75% $14,957,503

American Funds Growth Fund of America R4 15.97% $22,222,961

American Funds EuroPacific Growth R4 9.75% $13,569,258

Metropolitan West Total Return Bond M 9.01% $12,541,717

MFS Total Return R4 5.98% $8,322,914

American Funds Washington Mutual Inv R4 5.54% $7,704,797

Goldman Sachs Mid Cap Value Instl 4.63% $6,440,400

Vanguard Mid Cap Index I 3.99% $5,552,671

T. Rowe Price Mid Cap Growth 3.85% $5,352,210

American Funds Fundamental Invs R4 3.17% $4,417,597

Vanguard Small Cap Index Adm 3.12% $4,342,767

Franklin Small Cap Growth Adv 2.86% $3,981,064

DFA US Targeted Value I 0.78% $1,091,765

MFS Value R4 0.84% $1,175,104

Dodge & Cox Income 0.18% $254,078

Total Core Plan Assets 100.00% $139,182,934

Participant Count

Revenue Requirement (10bps)

Total Revenue Sharing Generated from Funds

Revenue Excess/(Shortfall)

Out-of-Pocket expense to meet Revenue Requirement

Sent to Trust Reimbursement Account

Total Paid for Recordkeeping

Total Paid for Recordkeeping on a per participant basis

Total paid by participants (per individual)

Expense

Ratio

Revenue

Share (%)

Revenue

Share ($)

0.25% 0.25% $68,140

0.04% 0.00% $0

0.68% 0.35% $77,780

0.84% 0.35% $47,492

0.68% 0.35% $43,896

0.50% 0.15% $12,484

0.65% 0.35% $26,967

0.74% 0.15% $9,661

0.08% 0.00% $0

0.78% 0.15% $8,028

0.66% 0.35% $15,462

0.09% 0.00% $0

0.91% 0.15% $5,972

0.40% 0.00% $0

0.63% 0.15% $1,763

0.43% 0.08% $203

0.497% 0.228% $317,848

Participant Count 2,927

Revenue Requirement (10bps) 0.100% $139,183

Total Revenue Sharing Generated from Funds 0.228% $317,848

Revenue Excess/(Shortfall) $178,665

Out-of-Pocket expense to meet Revenue Requirement 0.000% $0

Sent to Trust Reimbursement Account 0.128% $178,665

Total Paid for Recordkeeping 0.100% $139,183

Total Paid for Recordkeeping on a per participant basis $48

Total paid by participants (per individual) $48

Current Share Classes

Levelized

FeeCredit/Debit

Net

Participant

Expense

Total Participant

Recordkeeping

Expense

0.10% 0.15% 0.10% $27,256

0.10% -0.10% 0.14% $14,958

0.10% 0.25% 0.43% $22,223

0.10% 0.25% 0.59% $13,569

0.10% 0.25% 0.43% $12,542

0.10% 0.05% 0.45% $8,323

0.10% 0.25% 0.40% $7,705

0.10% 0.05% 0.69% $6,440

0.10% -0.10% 0.18% $5,553

0.10% 0.05% 0.73% $5,352

0.10% 0.25% 0.41% $4,418

0.10% -0.10% 0.19% $4,343

0.10% 0.05% 0.86% $3,981

0.10% -0.10% 0.50% $1,092

0.10% 0.05% 0.58% $1,175

0.10% -0.02% 0.45% $254

0.100% $139,183

2,927

0.100% $139,183

0.100% $139,183

$0

0.000% $0

0.000% $0

0.100% $139,183

$48

$48

Levelized Pricing

Sample Analysis

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Client Levelized Pricing Analysis

Investment Option% of Core

Plan Assets

Assets

9/30/2015

Guaranteed Income Fund 19.58% $27,256,129

Vanguard Institutional Index 10.75% $14,957,503

American Funds Growth Fund of America R4 15.97% $22,222,961

American Funds EuroPacific Growth R4 9.75% $13,569,258

Metropolitan West Total Return Bond M 9.01% $12,541,717

MFS Total Return R4 5.98% $8,322,914

American Funds Washington Mutual Inv R4 5.54% $7,704,797

Goldman Sachs Mid Cap Value Instl 4.63% $6,440,400

Vanguard Mid Cap Index I 3.99% $5,552,671

T. Rowe Price Mid Cap Growth 3.85% $5,352,210

American Funds Fundamental Invs R4 3.17% $4,417,597

Vanguard Small Cap Index Adm 3.12% $4,342,767

Franklin Small Cap Growth Adv 2.86% $3,981,064

DFA US Targeted Value I 0.78% $1,091,765

MFS Value R4 0.84% $1,175,104

Dodge & Cox Income 0.18% $254,078

Total Core Plan Assets 100.00% $139,182,934

Participant Count

Revenue Requirement (10bps)

Total Revenue Sharing Generated from Funds

Revenue Excess/(Shortfall)

Out-of-Pocket expense to meet Revenue Requirement

Sent to Trust Reimbursement Account

Total Paid for Recordkeeping

Total Paid for Recordkeeping on a per participant basis

Total paid by participants (per individual)

Implementing Levelized Solutions (Service Contracts)


Pricing Model Comparison

15

Revenue Sharing used to pay for

plan administration

Provider assumes risk of market

fluctuations and participant

investing behavior

Fund / share class changes may

necessitate Fee Review

Includes full suite of services

Fixed basis point Recordkeeping

Fee

The Plan assumes risk of material

changes in participant investing

behavior

Provider assumes risk of market

fluctuations

Surplus / Deficit varies based on

Administrative Revenue generated

by Plan investment options

Set number of services – Others to

be negotiated

Consistent per participant

Recordkeeping fee

The Plan assumes risk of all

market fluctuations and participant

investing behavior

Surplus / Deficit varies based on

Administrative Revenue generated

by Plan investment options

Set number of services – Others to

be negotiated

Time

Reve

nu

e p

er

Pa

rtic

ipa

nt

Bundled, Asset Based Model

Time

Reve

nu

e p

er

Pa

rtic

ipa

nt

Fixed Basis Point Model

Time

Reve

nu

e p

er

Pa

rtic

ipa

nt

Fixed Dollar Model

Actual Revenue Paid Revenue Surplus Revenue Deficit

Marketplace Solutions


Ordered from least to most desirable:

1. All “institutional” share classes (or equivalent, such as R6 share classes)

Not all fund companies have zero revenue sharing options

Share class efficiency becomes a major consideration

2. Quarter-end Balance

Account snapshot

Potential to game the system

3. Unitization / Comingled Funds

Varying NAV, no ticker, less transparency, custom fact sheets

4. Average Daily Balance Method

Good system, but not exact

5. Daily Accrual Method

Most precise method available, allowing daily accrual on an individual and fund level

Differences Between Levelization Techniques

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Investment OptionExpense

Ratio

Revenue

Sharing

Investment

ManagementEfficient?

Metropolitan West Total Return Bond M 0.690% 0.350% 0.340% Efficient

Metropolitan West Total Return Bond I 0.440% 0.100% 0.340% Efficient

Metropolitan West Total Return Bond Plan 0.390% 0.000% 0.390% NOT Efficient


Plan Sponsor Responsibilities

Excerpt from Field Assistance Bulletin 2003-3 (May 19, 2003)

“…ERISA contains no provisions specifically addressing how plan expenses may be allocated

among participants and beneficiaries…”

“…When the plan documents are silent or ambiguous on this issue, fiduciaries must select the

method or methods for allocating plan expenses. A plan fiduciary must be prudent in the

selection of the method of allocation. Prudence in such instances would, at a minimum,

require a process by which the fiduciary weighs the competing interests of various classes of the

plan’s participants and the effects of various allocation methods on those interests. In addition to

a deliberative process, a fiduciary’s decision must satisfy the “solely in the interest of

participants” standard…”

1. Plan Sponsors should determine how fees are allocated today

2. Document a prudent process for selecting an allocation method

3. Make a determination that the method selected is in the best interest of Plan participants.

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Disclaimer

Benefit Financial Services Group (BFSG) is a Registered Investment Advisor. These materials are provided for

general information and educational purposes based upon publicly available information from sources believed

to be reliable - we cannot assure the accuracy or completeness of these materials. The information in these

materials may change at any time and without notice. We are not soliciting any action based upon this

material. You should not assume that any discussion or information contained in this webinar serves as the

receipt of, or as a substitute for, personalized investment advice from BFSG. To the extent that a viewer has

any questions regarding the applicability of any specific issues discussed, you are encouraged to consult with

your professional advisor. BFSG is neither a law firm nor a certified public accounting firm and no portion of

the presentation content should be construed as legal or accounting advice. A copy of the BFSG current

written disclosure statement discussing our services and fees is available for review upon request.

The material contained herein is the work product of Benefit Financial Services Group (“BFSG”). It is for your

internal use only, and may not be published, disclosed, copied, or distributed without the express written

consent of BFSG.

This packet is intended for educational and informational purposes only.

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THANK YOU!

Contact us regarding our advanced Fee Levelization workshop

Christopher Rowey

(949) 955-3480

[email protected]

Chad A. Noorani

(949) 955-3031

[email protected]

www.bfsg.com

http://www.bfsg.com/

plan fee levelization - going "back to the future"

Economy & Finance