Monday, August 24, 2020

Defined Contribution Retirement Plan Fees: Lawsuits, Leveling and Lessons Learned

Ensure Money Saved by Plan Participants is Maximized Toward Their Investments


In a time filled with COVID-19 crisis uncertainty and increasing debt, setting money aside for retirement can be challenging. Fiduciaries need to do their best to ensure that the money saved by plan participants for retirement is being maximized toward their investments and not paying fees and other expenses.

Historically, there has been a lack of transparency around how recordkeepers and other service providers are compensated. However, the retirement industry has made significant strides over the last few years.  What used to be considered proprietary information has become legally required fee disclosure regulation.  As we continue to understand how fees are charged, we have learned a great deal on how our plan sponsor clients can assess and improve the fees they are paying to vendors.

Ignorance is Not Bliss

National and local law firms are actively pursuing cases pertaining to high fees in 401(k) plans. Fiduciaries must pay attention to the reasonableness of fees being borne by the participant. To help reduce the potential of litigation, we have identified five best practices for addressing retirement plan fees.

1. Use RFI/RFPs to routinely benchmark fees (every 3-5 years)
The recordkeeping space is becoming extremely competitive and the services being offered to plan participants continue to improve. Additional services may be available within the plan’s budget or plans might even be able to save money in other areas, such as payroll services or participant education if this is offered by the recordkeeper. An industry best practice is to routinely send plans out for bid within the marketplace, not just with the existing recordkeeper, but to competing firms. This is the most immediate and accurate way to determine if the fees currently being paid are reasonable. Even if the plan sponsor stays with the incumbent provider, there are often cost savings and/or additional services being offered beyond what was being received as a direct result of this process

2. Separate Vendor Fees from Investment Fees
In a plan where the investment selection is participant-directed, a participant can choose to put their assets into the funds available in the plan’s investment menu. Some of these funds may have differing investment fees, but they may also have differing revenue share percentages. When a recordkeeper charges based on a certain revenue requirement, the recordkeeper will withhold all of the funds generated from revenue sharing in an escrow account and use those funds to cover their recordkeeping and administration fees (assuming a plan is not fee-leveled). There are two issues with this methodology. One, if participants select different funds that have different amounts of revenue sharing, it is not fair and equitable to each participant. Some participants will be paying more toward recordkeeping fees simply because of the investments they select. Two, , if more revenue share is collected than the required amount to the recordkeeper, the money ultimately stays in this escrow account, sometimes not making it back to the participant that generated the funds in the first place. Due to the lag in collection and ultimate rebate, the participant may have left the plan or passed away and their beneficiaries may never receive the funds.

3. Price Administration Fees on a Per-Participant Basis
Having recordkeepers assess their fee based on the number of participants in a plan is transparent, easy to understand, and evenly distributes the cost of the plan across all participants. This also helps the plan sponsor control the costs as the plan grows over time. If the plan is charged based on the number of participants, then the vendor’s fees can be scaled to the workload. Although it may be a bigger portion of the participant’s account at the onset to pay a flat fee, over time it will save them money as their account size grows. If particularly cumbersome, plan sponsors do have the option to implement thresholds for when and how much participants are charged including a per-participant fee aggregated on a pro-rata basis or through setting a minimum account balance before a participant is charged.

4. Benchmark & Negotiate Investment Fees Regularly, Considering Both Fund and Vehicle
Many mutual fund companies offer multiple share classes for the same investment vehicle and each share class will charge differently, usually based on the number of assets being held in the fund or by the amount of extra revenue they are generating for a recordkeeper. These companies certainly are not going to call a participant when they have acquired enough assets and say they would like to charge them less because they have reached a certain price break. Fiduciaries must be active and complete due diligence to find more cost-effective options. Innovest conducts share class reviews for our clients on an annual basis and helps leverage economies of scale to pay the lowest fees possible. Plans with larger assets may even qualify for Collective Investment Trusts (CITs) as an alternate vehicle to consider for reducing investment fees even further.

5. Monitoring Transaction Fees
When conducting a vendor RFI/RFPs or renewing existing contacts, be sure to negotiate transaction fees to reduce the overall cost structure. Certain recordkeepers may charge participants for withdrawals, loans, managed accounts, etc. These fees are in addition to the fees already being paid by participants for investments, administration and recordkeeping. The more a vendor includes these a la carte fees in the base price already being paid, the leakage is prevented from participant’s account balances. Fiduciaries should consider reviewing the fees charged to the plan and its participants on an annual basis.

Managing retirement plan fees is a win-win for participants and fiduciaries. The less a participant pays in fees, the more they will have in their accounts for retirement and the less likely plan sponsors will be involved in legal proceedings.

Innovest Portfolio Solutions, is a Consultant Member of TEXPERS.The views expressed in this article are those of the author and not necessarily Innovest Portfolio Solutions nor TEXPERS.

About the Authors

Paul Nacario is a Vice President for Innovest. He is responsible for business development and serves as a consultant. Nacario has 29 years of experience in the defined contribution retirement marketplace. He is experienced in plan administration and recordkeeping, participant education, retirement plan design, Request for Proposal (RFP) process management, fee negotiation, investment portfolio construction, compliance testing and fiduciary training.

Nacario has been involved in the National Association of Government Defined Contribution Administrators (NAGDCA) for over 20 years, as well as the Government Finance Officers Association (GFOA), the National Association of Counties, the Unites States Conference of Mayors, the International Association of Fire Fighters (IAFF), Western Pension & Benefits Council and the League of Cities. Have questions? Contact Nacario at

Kyli Hanson is a member of the Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to better serve retirement plan clients. She helps manage these processes and assists in Innovest’s retirement plan efforts by coordinating the work of the analyst team that supports the Retirement Plan Practice Group.  Hanson’s responsibilities also include designing and building client performance reports. She graduated with distinction from Yale University with a Bachelor of Arts in both economics, as well as near eastern languages and civilizations with a concentration on the ancient near east.

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