Lifting the veil of employer-sponsored retirement plan costs
There are two primary expense categories related to Employer-Sponsored Retirement Plans: Investment Services Fees (mutual fund management) and Service Provider Fees (recordkeeping, administration, advisor services).
Recent fee disclosure regulations, such as 408(b)(2), have changed the world of fee transparency by revealing how expense ratios, revenue-sharing agreements, and wrap fees are used to pay for plan services. There is already a growing concern that plan participants may not have adequate income for retirement. Thus, it is important to understand these fees and how they are paid.
Plan participants pay the Investment Service Fees associated with mutual fund investments offered in their employer-sponsored retirement plan. These fees are referred to as the mutual fund’s Expense Ratio, and typically range from 0.50% to 1.5%. Through a revenue-sharing agreement, mutual fund companies may pay some of the revenue generated by the expense ratio to the service provider. While these payments vary depending on the mutual fund family, service providers use this revenue to offset the cost of plan services provided to participants. Service providers could potentially use some of the revenue to pay for advisory services. If the revenue-sharing agreement does not generate enough money to cover the cost of providing administrative services, service providers may also assess an asset-based fee (referred to as a “wrap-fee”) on top of the expense ratio to provide any additional revenue required to cover the cost of providing record keeping, administration, and advisor services. However, many employers and plan participants are unaware of these implicitly-netted expenses.
WGA’s Retirement Services Team can evaluate and quantify the fees associated with an employer-sponsored 401(k) or 403(b) retirement plan. We can calculate the weighted-average expense ratio for the plan and compare it to other plans with similar Assets Under Management (AUM). This information helps the plan sponsor meet one of their primary fiduciary responsibilities; determining if the plan-related expenses are reasonable and customary. If you are unsure of the cost of your Employer-Sponsored Retirement Plan and how much of that cost is being implicitly/explicitly charged to your plan participants, then you might benefit from talking with a member of WGA’s Retirement Services Team. We can explain the significance of having measurement criteria in place, and implement a process to protect you going forward.
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