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What If: You Don’t Understand Your Retirement Plan’s Fees?
Most plan sponsors realize that fees are one of the most important aspects of their plan responsibilities, though understanding them can be challenging for many. In this blog, we will be discussing details of many fee structures and how to decode a variety of approaches.
What if: You Don’t Understand How Your Fees Work?
When it comes to your retirement plan, how confident are you in these questions:
- Are your retirement plan fees paid from company funds or plan assets?
- Are your retirement plan fees calculated as pro-rata, per-capita, or asset-based?
- Are your retirement plan fees applied as pro-rata, per-capita, or asset-based?
- Does the plan generate investment revenue sharing? How much and how is it used?
An Example
Let’s look at an example. Imagine a $40 million retirement plan. The largest balance is $2 million, and the smallest 15 balances total $20,000. There are 400 participants, and the fee is $40,000.
Pro-Rata Fee Applications
In the case of a pro-rata fee application, the largest balance will be charged $2,000, and the smallest 15 balances will be charged $20 altogether.
Per-Capita Fee Applications
In the case of a per-capita fee application, everyone would pay $100, whether they possess the largest balance or the smallest.
Is it clear-cut? Which way should you go? Should the largest balance pay 100 times the fee of the 15 participants with the smallest balances? Should the smallest 15 balances pay a combined fee that is 75x higher?
Now, let’s consider the several things I neglected to tell you.
What If
What if the largest balance is the CEO’s?
What if the plan fails testing and the CEO is already limited to a $14,000 contribution?
What if the fee is calculated as 0.10% of assets?
What if the fee is calculated as $100 per participant?
What if the fee is calculated as $20 per participant and 0.05% of assets?
What if the fee is a flat $40,000?
Would any of these items change your mind as to how you want your fee to be calculated or applied? It probably should, as there have been many examples of litigation targeting this very topic.
The Wrong Answer
The bottom line is this: while there isn’t necessarily a right answer to your fee structure choice, there is a wrong answer. It’s the one answer that’s ALWAYS the wrong answer. This answer? “I don’t know.”
Only slightly less damaging than “I don’t know” is knowing what the fee is and how it’s charged but having no logical reason for why you’ve handled it that way.
The 5 Steps to Avoiding “I Don’t Know”
There are five steps that can help you identify your best path forward, implementing the industry’s best practices.
They are:
Step 1: Ask! Don’t be afraid to push for details.
Step 2: Benchmark, but don’t stop there.
Step 3: Beyond ensuring fees are reasonable, ensure an understanding of how they’re applied to your plan and participants.
Step 4: Talk with your recordkeeper to see what their system can accommodate.
- Are combined per-capita and pro-rata applications possible?
- Can small balances be treated differently?
- Can terminated participants be treated differently?
Step 5: Last, but certainly not least — document, document, document. This is the most important step of all.
SWBC Retirement Plan Services is Here for You!
At SWBC Retirement Plan Services, our experts know what it takes to create a quality, compliant retirement plan for those you sponsor. Ready to learn how we can help your retirement plan? Learn more about how we can help you and contact us here!
Brad Ferguson
Brad is the Chief Executive Officer of SWBC Retirement Plan Services and also serves as a voting member of SWBC’s Investment Committee. He has more than twenty years of experience in providing fiduciary services to plan sponsors in the retirement plan industry and is committed to guiding retirement plan sponsors and providers through the evolving retirement plan landscape.
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