Although using the revenue generated by the Plan’s investment funds to pay investment, advisory or recordkeeping fees may seem at first a “no-brainer”, this decision requires financial analysis, assessment of fiduciary obligations, and an examination of the Plan Sponsor’s goals. Here are some of the things to keep in mind:
Paying Fees from the Plan Has Fiduciary Implications.
Initial and On-going Responsibility. If the Plan’s assets (including revenue sharing) are paying Plan fees, then the Plan fiduciaries have the duty to determine whether the fees are reasonable. This is an on-going responsibility. For example if fees are based on a percentage of assets, as the Plan’s assets grow the amount of fees may become unreasonable. Further market changes may mean that once reasonable fees have ceased to be reasonable. To satisfy their on-going fiduciary duty, many advisors recommend that the Plan’s fiduciaries “benchmark” their Plan’s fees against those of other plans every two years.
Potential for DOL Challenge or Participant Fee Litigation. If the Plan’s fiduciaries fail to prudently exercise their fiduciary duties with respect to the fees paid from Plan assets, the Plan fiduciaries may face liability or the expense of defending against claims of excess fee payment. While participant fee litigation is more likely in the large plan market, even small and medium size plans may be subject to DOL claims based on fee reasonableness as the DOL will examine this area during its Plan compliance audits.
Consider the Company’s Goals and Overall Budget.
Revenue Sharing. If the lowest fee class of mutual fund shares available to the Plan will produce fees that the Plan can use to pay recordkeeping and advisory services, then it makes sense to use those fees. However, if the share class of mutual funds needed to produce revenue is higher than otherwise available to the Plan, selecting the higher fee share class will reduce the participant’s investment returns. For example, an owner with a $500,000 account balance will have an account that is worth approximately $150,000 less after 20 years if the Plan’s investments are invested in mutual funds with just an extra 25 basis points (.25%), assuming an annual 7% rate of return.
Account Charges Impact Employee Retirement Readiness. Should a Plan Sponsor decide to use the lowest fee funds available and finds that there is insufficient revenue to pay for all Plan expenses, the Plan Sponsor may consider charging Plan participants a per participant fee to partially or fully offset the Plan expenses. However, to the extent that fees are charged to participant accounts, it will take the employee longer to accumulate dollars for retirement, and projections are that many employees will lack retirement readiness based on their debt and low savings rates outside of the Plan. This may result in lost productivity if employees wish to retire and are no longer happy working, but are unable to retire based on lack of retirement savings.
Deduction Available for Company Paid Plan Expenses. A Plan Sponsor may deduct the Plan expenses that it pays. Thus, Plan Sponsors should take into account the value of the deduction in evaluating the cost of paying Plan expenses.
