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Michael Sasso and Jean Martone Quoted by PlanSponsor

Factors Included in Fee Decisions

An excerpt from an article by PlanSponsor featuring quotes from PEI partner and co-founder Michael Sasso and group director Jean Martone.
By Rebecca Moore

“Retirement plan fee litigation has heightened plan sponsors’ interest in their fiduciary responsibilities regarding fees, noted Michael Sasso, partner and co-founder of Portfolio Evaluations, Inc.

So far, the litigation has targeted large-market plan sponsors, but Sasso feels it will naturally trickle down to smaller plans, he told attendees of the Plan Sponsor Council of America (PSCA) 69th Annual Conference.

Michael Olah, managing principal at Michael J. Olah & Associates LLC, added that he has heard a lot of talk that retirement plan sponsors are not going to settle lawsuits anymore and will force trial. “The risk to the industry is that opinions will come down as judgements which will become precedent,” he said.

Olah expects litigation may be coming about why large plans pay less than small plans—why providers are not leveraging technology to reduce administrative fees. He also said the Department of Labor’s (DOL’s) fiduciary rule may spark litigation about adviser fees, especially if plan participants share in the cost. And, Olah anticipates more target-date fund (TDF) legislation coming out of the fee focus, especially about the use of recordkeeper’s proprietary TDFs or TDFs that use only one fund family.

Retirement plan sponsors need to know what choices they have in pricing models and how to pay for plan fees in order to make the best decisions. Jean Martone, director of the Retirement Plans Group at Portfolio Evaluations, Inc., explains there is a “bundled” pricing model in which the retirement plan provider collects all revenue sharing from the plan’s investment options, and a targeted required revenue for it to keep to pay for costs may be recommended to the plan sponsor. She said the pros of this model is the provider will assume the risk in down markets and not charge the plan sponsor, and the plan sponsor will not incur hard dollar fees if the revenue target is not met due to participant behavior.

However, Martone noted that there is a move away from this pricing model to other models. With a “basis point” model, the plan provider sets a revenue requirement as a percentage of plan assets. With a “per participant” model, the provider sets a per participant fee. With these models, the plan sponsor gets any excess revenue generated and has the option to use this to create an account to help with eligible plan expenses or to rebate the excess to plan participants. “This is the shift in the industry,” she said.

He said he doesn’t think a new fiduciary safe harbor for selecting annuity providers is going to open the floodgates of plan sponsors adopting annuity options in their plans. But, plan sponsors are having conversations about the purpose of their defined contribution (DC) plans, and how to help employees establish a source of retirement income. ‘This is one reason more plan sponsors want employees to keep their assets in the plan after retirement,’ he said. He added that offering installments as a distribution option in the DC plan is a ‘no-brainer’ for plan sponsors.”

To read the full article, as originally published on PlanSponsor‘s website on May 9, 2016, click here.