To be sure, fees are one of the most ubiquitous topics in the retirement plan industry today. Googling some variation of “401(k)” and “fees” yields anywhere from 700,000 to over 10 million hits. How to allocate those fees, is not as common, but it is an important issue.
There is no ERISA statute governing how to allocate recordkeeping and administration (RK & Admin) fees, but if they are being paid by participants the following is true:
- The Plan Sponsor has control over how recordkeeping and administration fees are being paid.
- There are a variety of methodologies that can be used to allocate RK & Admin fees to participants.
- The decision of how to allocate RK & Admin fees to participants is a fiduciary decision.
The plans sponsor stands at the crossroads of how the plan is charged fees by the service provider (per participant or asset based), and how fees should be allocated to the participants (per capita or pro rata).
Charging a per participant fee for administrative services seems fair. As the recordkeeper, we don’t do more work for the $100,000 participant account balance than we do for the $10,000 account balance. Furthermore, as assets increase (or decrease) we don’t necessarily do more (or less) for that plan. So, for a recordkeeper to charge an asset-based fee doesn’t make much sense.
Allocating fees to participants per capita may seem fair, but this approach overburdens participants with low plan balances. Allocating fees pro rata appears to be more equitable since participants with higher account balances are at least paying the same proportion in fees as those with smaller balances.
Unfortunately, many recordkeepers, especially the insurance companies in the small and mid-market, charge an asset based fee and may not have the ability to charge a per participant fee or use a blended approach (charging both an asset based fee with a per participant charge).
There is no perfect solution, but there is a good process to come up with a fair approach to paying for plan recordkeeping and administration (and it’s all about process!).
First, understand the issues. There are a few excellent white papers on the topic, including “Assessing Fee Fairness” by the TIAA Institute.
Second – get a clear understanding of how your clients’ fees are being assessed today. Check with your current recordkeeper.
Third – know that you do have a choice. CDM/NWPS for example, calculates our fee based on head count and plan complexity. They can then be allocated to participants in any way the plan sponsor prefers. For some plans, pro rata may make sense, for others a percent of assets may be more appropriate. We can also allocate fees using a blended approach if that’s in the best interest of the client. It is a benefit of using a flexible, highly service-oriented company. Our belief is that how fees are charged by the service provider is independent to how fees should be allocated to plan participants.
Fourth – Talk with your clients to make them aware of this issue. Consider such factors as plan complexity, number of participants, amount of assets, and average and median account balances so that a prudent decision can be made as to how to fairly allocate fees.
Fifth – Make a decision, document the rationale and record that in the plan file.
Don’t limit the fee discussion at simply what will be charged. Think too about how fees are charged and how they are allocated.