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Administrative Fees in DC Plans

Over the last several years, fee reviews and benchmarkings have become part of most plan sponsors’ documented fiduciary processes. This is certainly a direct result of the 2012 mandate of IRC Section 408(b)(2) which requires service providers to furnish written disclosures of their compensation, although many recordkeeping providers had begun to provide “fee transparencies” to plan sponsors prior to 2012.

The initial analysis and discussions were mainly focused around what the administrative fees were and whether they were in fact “reasonable.” Today, there seems to be a shift to discussions surrounding pricing models and how to pay for the plan.

Historically, most plans have been in so called bundled pricing models whereby the vendor collects the revenue sharing to offset the administrative expenses of a plan. Until fee disclosures became universal, most plan sponsors were unaware of how revenue sharing was credited.

As investment lineups are continually changing and evolving, revenue sharing in turn is being impacted. This is the result of a number of factors including the use of index funds and collective trusts that do not revenue share as much as retail mutual funds. High balances in company stock also pose a challenge for plan sponsors who historically have not imposed a fee on account balances in company stock.

ERISA does not prohibit revenue sharing or address how plan expenses may be allocated among participants and the Department of Labor (DOL) has not issued any guidance on the allocation of revenue sharing. In Field Assistance Bulletin 2003-03 the subject of which dealt with The Allocation of Expenses in Defined Contribution Plans, the DOL said that fiduciaries “have considerable discretion in determining, as a matter of plan design or a matter of plan administration, how plan expenses will be allocated among participants and beneficiaries.

Plan sponsors nonetheless need to be aware that the allocation of fees in a defined contribution plan is a fiduciary decision. DOL Advisory Opinion (2013-03A) was issued on behalf of Principal Life Insurance Co. and dealt with the issue of “ERISA budgets.” As part of that advisory opinion, the DOL noted that plan sponsors must act prudently and in the best interest of plan participants in the negotiation of revenue sharing arrangements. Yet the DOL also said that “This letter also does not address any fiduciary issues that may arise from the allocation of revenue sharing among plan expenses or individual participant accounts . . .

Given the aforementioned complexity of fees and the rapidly changing nature of fees in defined contribution plans, PEI feels that as a fiduciary best practice, plan sponsors should be discussing plan fees and pricing structures at least annually and documenting these discussions.