Over the years, plan sponsors have sought more and more transparency in fees after the heightened awareness brought on by 408(b)(2) fee disclosure rules in 2012 and a desire to simplify their plans. The financial services industry responded by introducing zero revenue sharing investment vehicles that offer more transparent fee structures. Previously available to institutional plans, they have continued to move downstream into mid-market and even smaller plans.
Plan Sponsors will want to consider how to structure fees in the best interest of participants. However, there are caveats to these changes, and how they may affect recordkeeping fees paid by participants.
The Growth in Zero Revenue Share Products
Most asset managers offer zero revenue sharing investment options.
These products strip out all the revenue sharing, sub-TA, omnibus and similar fees that may be built into investment vehicles in order to cover plan recordkeeping costs. These share classes allow plan sponsors to separate recordkeeping costs from investment management.
Among the zero revenue share vehicles are R6 mutual fund share classes, which also remove 12b-1 fees in order to offer the lowest cost share class available. R6 shares already comprise $778 billion in assets as of 3/31/201. Depending on the asset manager, I shares or other similar share classes may serve the same purpose.
As plans grow in size they may as an alternative become eligible for collective investment trusts (CITs), which exclude “other” expenses found in mutual funds. CITs have grown in popularity in recent years, with 27% of 401(k) assets or $1.5 trillion invested in them2. CITs, however, typically have higher minimums than mutual funds, require additional paperwork and may be less readily available on third-party recordkeeping platforms.
Considerations for Unbundling Recordkeeping and Investment Management Fees for Plan Sponsors
By “unbundling” recordkeeping and investment management fees, plan sponsors gain greater visibility into fees and can better scrutinize relative costs and values for all plan administrative functions. The flipside is that it also makes recordkeeping fees a separate expense item, something that sponsors who have recordkeeping fees offset through some kind of revenue sharing may not be accustomed to.
In many cases, the recordkeeping fees would be paid by the employer directly, after receiving a bill from their recordkeeper each month, quarter or year. On the plus side, plan sponsors can tout a new, less expensive plan, and the fact that the employer is providing a new benefit to employees in the form of coverage of their plan recordkeeping fees.
An alternative solution is to have the employees pay recordkeeping fees directly themselves. Most recordkeepers tally up annual recordkeeping expenses to come up with a “per head” charge for all services and can levy this charge each year against each participant’s plan assets. For plans with a large number of accounts with small balances, however, this can result in some participants paying a disproportionate share of overall plan expenses.
Another alternative would be to assess participants an assetbased recordkeeping fee. While this alleviates the issue for accounts with small balances, it could cause higher paid employees, high savers or company officers to pay the majority of the fees out of their own, typically larger, account balances.
The ERISA Credit Account
For those plans that do not want to unbundle recordkeeping and investment management fees, a convenient way to control the payment of recordkeeping fees is through an ERISA Credit Account. These are secure holding accounts where any revenue sharing received from plan investment options is deposited into a special account at the recordkeeper.
The plan sponsor can then designate the type of plan fees paid—including recordkeeping, trustee and custodial fees, and participant enrollment expenses—by “writing checks” against the account. This allows greater control over what fees are paid when, as well as greater visibility into the types and amounts of expenses paid. While revenue sharing is not eliminated, this allows for a leveling of revenue‑sharing fees.
Implementing Zero Revenue Sharing
As plan sponsors structure fees in their plan, there are a few caveats to keep in mind:
- Some plans may be better off under their current structure, particularly in the small plan marketplace.
- Recordkeeping solutions vary by provider; some recordkeepers can’t bifurcate recordkeeping and management fees, so be sure to know the policy before you propose zero revenue share as a solution.
- Your plan advisor or consultant will likely charge a fee for providing plan services as zero revenue sharing vehicles don’t typically include advisor compensation.
- Plan sponsors should follow the path that is right for the plan based on its asset and participant size, expected growth in employees, and investment management objectives.
Zero revenue share is not the only solution to fee transparency. However, goes a long way towards addressing the central concern brought out by 408(b)2: the reasonableness and visibility of all the various fees assessed to DC plans.
1 Source: Morningstar as of 3/31/20
2 Sources: Cerulli Associates 2019, based on data as of 12/31/18
This information is provided as general guidance. It is not intended to be legal or tax advice. Employers should contact their legal and/or tax advisors regarding the facts and circumstances around their own retirement plan and the applicability of the issues discussed in the communication.
This commentary has been prepared by Voya Investment Management for informational purposes. Certain information may be received from sources Voya Investment Management considers reliable; Voya Investment Management does not represent that such information is accurate or complete. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing.
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