Fairness for Defined Contribution Fees
disclosures to participants has increased
the likelihood that participants will be
asking questions and increases the risk
of fiduciary exposure if participants are
not pleased with the answers.
Paying plan administrative costs with
asset-based fees presents issues of fairness
and can be problematic if not followed
carefully over time.
On timing, consider the 401(k) plan
with 100 participants at the end of
2012 and total plan assets of $4 million.
Assume the plan has about $300,000 in
net contributions for 2013, with plan
assets growing by 20% from investment
performance, yielding plan assets at the
end of 2013 of $5.1 million.
If this plan had a stable workforce and
experienced no more than average plan
activity (retirements, new hires, etc.), it
might be concluded that administrative
costs would remain fairly constant. The
recent trend, in fact, has been to see
administrative costs go down as the
result of improved technology. If this
plan paid administrative fees strictly
on an asset-based model, however, its
fees would go up by over 25% simply
as a result of the growth in plan assets.
What was reasonable for the 2012 fees
may have become unreasonable in 2013.
This problem can be addressed with
thoughtfulness and creativity in working
with the service provider. Suggestions
include capping asset-based fees at a
dollar amount per participant, or agreeing
on a flat administrative cost per year.
Investment fund fees that may come to
a service provider (sub-advisor, 12b-1,
and other fees), can be reallocated to
participants through an ERISA account
in the plan. An “ERISA account” is
a plan account that is not held in the
name of an individual, but rather it is
a temporary holding account for the
asset-based fees paid from the plan’s
investment funds. An ERISA account
is generally reallocated in some manner
on an annual basis.
A second issue of fairness among
participants arises in many plans because
the asset-based fees generated by plan
investments are not spread equally over
all investment funds. Employer stock
funds, for example, typically generate
no asset-based fees that can be used for
administrative purposes. Among mutual
fund choices, some funds may generate
40 basis points (0.40%) to a service
provider while others generate nothing.
It is not fair on an individual participant
level if one participant’s investment
choice provides 40 basis points toward
the cost of administration, and another
participant, due to different investment
choices, “contributes” nothing toward
overall plan costs.
Again, this potential disparity among
participants, even if overall plan costs
are reasonable, can be addressed through
the plan’s service agreement and fee
structure, as well as the use of an ERISA
account.
starting out with a zero account balance,
the same administrative amount as a
participant with a $500,000 account
balance. Some blending of per capita
flat fees and asset-fees, therefore, may
be appropriate.
The principal point here is that individual
account plan service agreements and fee
structures should not be once-negotiated
and left on auto-pilot. Fairness, as well
as fiduciary responsibility, demand that
these agreements be reviewed annually.
In addition, an annual fee and service
agreement review may be far more
beneficial to participants than time
spent going over a review of global
markets, prognostications on interest
rates, and projections of economic trends
in the U.S., Japan, Europe, and China.
Attention to plan fee structures and
overall costs will minimize fiduciary
risk and improve participant retirement
prospects. n
Daniel Sharpe is a Member of Bond, Schoeneck
& King, PLLC, a law firm. Dan and his
colleagues in the Employment Benefits and
Executive Compensation Practice Group have
been exposed to most legal issues affecting
employee benefit plans since the original
effective dates of the Employee Retirement
Income Security Act of 1974. Dan’s practice
recently has focused increasingly on the
fiduciary aspects of managing retirement plans.
The concept of “fairness,” however,
can be elusive. While it might be argued
that total plan costs can be accurately
expressed as a flat dollar amount per
participant, the tr