Since most retirement plan administrative costs are paid by “the plan” and not the employer, there is a direct pathway between cost efficiency and participant returns. And, when we say that “the plan” pays the costs, we are really saying that “the plan participants” are paying the costs. If you’re shaking your head, just think about it. If the employer isn’t paying the costs and if there’s not a quarterly participant account debit, where’s the money coming from?
Plan economics 101: Every plan has its own economics -- administrative money coming in and administrative money going out. If there’s not enough money coming in, your vendor will let you know. But, if the inverse is true, how would you know if your plan is generating more administrative revenue than the vendor should reasonably receive?
The cost side of the equation: It costs a certain amount of money for a plan vendor to do a competent job of recordkeeping and administering your plan and providing any ancillary services you may have contracted for. Depending on the size of your plan and the breadth of services provided, the cost per-head could range from around $60 to upwards of $125 annually. Some vendors like to quote their fee in basis points (as a percentage of plan assets), but you can convert this into a per-head cost by dividing the total cost by the number of balances in the plan.
It may be reasonable to pay at the upper end of the range to a vendor providing an exhaustive suite of education and other services, even though a bare bones job could be had for less. This gets into the topic of reasonableness determination, which we have addressed previously. (See: “4-0-What? (b)What?”) Typically, a vendor’s costs are impacted more by headcount than anything else. It’s ten times as expensive to mail statements to 1000 participants as to 100 – same logic applies to call center and website usage, etc. In general, a vendor shouldn’t charge more just because the plan has more assets in it, as that doesn’t drive the workload.
(It’s worth stating that it might be appropriate for an adviser to receive asset-based compensation for incentive reasons or if they are accepting fiduciary liability with regard to the plan’s assets.)
The revenue side of the equation: Many, if not most, retirement plan investments generate something known as “revenue sharing”. This is a very important concept to understand. Equipped with this understanding, you will be a more effective fiduciary and better able to help your employees achieve satisfactory outcomes.
Revenue sharing commonly comes in two forms: “12b-1 fees” and “sub-TA credits”. What are 12b-1 fees? These are payments made by mutual funds to intermediaries, and are included in a fund’s expense ratio. They vary, but a rough guide would be as follows:
- Pure no-load funds don’t pay anything;
- Bond funds often pay 10 or 15 basis points (10 to 15 one-hundredths of a percent of the asset amount); and
- Stock funds commonly pay 25 basis points (one-quarter of a percent annually of assets).
Often called “trails” or “service fees”, these commonly go to the broker that sold the investments to the plan. If they are being paid to a broker, it is a fiduciary obligation of yours to ensure that the amount of comp being paid is reasonable in relation to the services being provided to the plan.