Nonprofit Plan Sponsors Still Confused About Fee Levelization

Data shows about one-fourth of nonprofit plan sponsors are not aware of what comprises a formal fee policy statement, and half of respondents are unfamiliar with the tenants of fee levelization.

The Plan Sponsor Council of America (PSCA) has published the PSCA 2017 403(b) Snapshot Survey, sponsored by Principal Financial Group, reflecting responses from 250 not-for-profit organizations that currently sponsor a 403(b) plan.

At a high level the survey shows fairly strong knowledge among plan sponsors of the most important industry terms and trends. However, a number of key terms commonly present difficulty—in particular the terminology surrounding “revenue sharing,” “fee levelization,” “fee policy statements,” and “3(21) vs. 3(38) advisers.”

Fully one in three nonprofit plan sponsor respondents are unsure if their plan uses revenue sharing to pay expenses, including 50% of small plans. At the same time, just one in four plan sponsors can confirm if they reallocate revenue sharing among participants, while one-fourth of respondents are admittedly unsure.

PSCA suggests the majority of plan sponsors use an adviser in a 3(21) fiduciary capacity, so-called for the section of the overarching benefits law in which this particular type of adviser-client relationship is enumerated. Most survey respondents could identify whether they used a 3(21) versus a 3(38) adviser, yet a still-troubling 5.6% of respondents could not say for sure. This number is highest among smaller plans.

Also troubling, PSCA says, the data shows about one-fourth of respondents are not aware of what comprises a formal fee policy statement, and half of respondents are unfamiliar with the tenants of fee levelization. There is especially low awareness of what goes into fee levelization among the smallest plan sponsors. The same goes for the construction of investment menus: 7.3% of all respondents were not sure what types of investments their plan offers, jumping to 15.6% for the smallest plan segment.

Additional findings show the percentage of plans aiming to move to zero revenue sharing designs is much higher among the largest plan sponsors. For those with more than 1,000 participants, nearly 21% are moving down this path, compared with just 7% of plan sponsors with 50 or fewer employees.

PSCA’s analysis demonstrates there is a sizable number of plan sponsors—again more in the smaller end of the market versus the larger—who are unsure whether the organization or the individual participants, or a combination, pay the plan fees. Just 1.8% of plans with more than 1,000 participants admit this, while 13.9% of plans with fewer than 50 participants do so.

Continuing the trend, the smallest sponsors are much less likely to have a formal fee policy statement in place: Whereas 50% of plans with more than 1,000 cite having a formal fee policy statement in hand, only 13.9% of sponsors with fewer than 50 employees say the same.

The full survey results are available here.