The regulatory environment over the last 10 years has made fee transparency—especially investment fee transparency—all the more important, with notable regulatory action for both plan-level and participant-level fee and expense disclosures. Regulations, coupled with increased scrutiny from the Department of Labor (DOL) and prominent lawsuits, have led many plan sponsors and advisers to examine the revenue sharing in existence in their plans. To discuss this issue, PLANSPONSOR sat down with two Securian Financial Group executives, Ted Schmelzle, director of plan sponsor services, and Kent Peterson, director of investment services, to address the current fee environment and best practices for plan sponsors and advisers.
PS: Kent and Ted, what are some of the challenges that plan sponsors face in administering their retirement plans, specifically in administering and benchmarking fees in their retirement plans?
Peterson: Plan sponsors have an ongoing responsibility under the Employee Retirement Income Security Act (ERISA) to understand the fees that they pay for their plan. And when it comes to investment-related expenses, it continues to be more complicated than necessary to discern what fees are being paid. That complexity is partially related to the concept of revenue sharing. Revenue sharing has been used to pay all sorts of plan expenses over the years—in particular recordkeeping and advisory fees. Plan sponsor awareness of revenue-sharing choices has grown, which, coupled with recent litigation, has created a sense of urgency for plan sponsors to be more focused on it, but the requirement to understand the revenue sharing better has always been there.
PS: Absolutely, the stakes are high. What are some of the risks that plan sponsors face if they’re not approaching fees the right way?
Schmelzle: The largest risk in my estimation is participants paying elevated fees, which affects their retirement readiness. The risks to the plan are litigation and regulatory scrutiny.
On the litigation front, the fee and expense litigation that started 10 to 12 years ago against plan sponsors and recordkeepers continues to focus on revenue sharing and fee transparency. As for regulatory scrutiny, the Department of Labor is now actively monitoring plan sponsors to assure that they are complying with the obligations under 408(b)(2).
Peterson: Another key element here is that revenue sharing can oftentimes make it very difficult to apply fees on an equitable basis across participants. When plan sponsors select a core investment lineup, share class selection amongst those investments can also create the unintended consequences of some participants paying more, some paying less, and some paying maybe none at all of certain plan expenses. This is due to the fact that some funds pay revenue sharing and others do not.
Plan sponsors have not appeared to appreciate that fairness issue historically, but sponsors need to rectify the situation because, ultimately, they do not have a good answer for why one participant would pay more versus another for those sorts of plan expenses.
PS: What are the solutions for plan sponsors to mitigate those risks?
Peterson: Historically, there has been an intertwined nature to what funds and share classes are available through a particular recordkeeper or what share class has to be used because of a particular service that’s being requested by a plan sponsor. This creates the element of actual, perceived or potential conflicts of interest. When you’re a fiduciary, one of the basic principles that you need to adhere to is avoiding conflicts of interest or, if you can’t avoid them, understanding them. Now that conflicts are more visible, it’s really about helping plan sponsors manage them to achieve the most efficient process for their plans.
PS: What about ERISA bucket accounts? Are those a way for plan sponsors to understand their conflicts?
Schmelzle: ERISA bucket accounts are currently in vogue, and although I do believe those are a good faith attempt to return revenue sharing, they often fall short because they are, at best, imprecise. For example, whenever you move money into an ERISA bucket account, you start losing out on the time value of money for those contributions.
Peterson: I’ve never experienced revenue sharing in my retirement savings because it’s always been put back the same day that it was taken out. But I think that, if in reviewing my benefit statement I saw I received a credit, I’m not sure I would say: “That’s great I got a credit,” but rather: “Where did this credit come from?” The answer to that is that the plan has been taking money out of my account on a daily basis and is giving it back 30, 60 or 90 days later. I’m not sure I would think that is a great deal because, in essence, it is basically a loan with no interest. From my perspective, I think I would say, “Don’t take it. It’s not a good thing to give it back to me in the future, just don’t take it.” And I think that’s what we’ve achieved at Securian.
PS: How does Securian help plan sponsors deal with these fee challenges?
Schmelzle: Securian differentiated itself way back in 1993 by creating a structure that was fiduciary-friendly for plan sponsors. We wanted to avoid revenue-sharing conflicts of interest for ourselves and for plan sponsors. In order to do that, revenue sharing had to be completely removed from the equation.
We engineered our separate account structure to remove the influence of revenue sharing by crediting it back to the participant on a daily basis, without the use of ERISA accounts and all their many risks. This means neither participants nor plan sponsors are impacted by share class issues or allocation of revenue sharing.
Once we were able to remove revenue sharing, we then looked to use the most efficient share classes—the share class with the lowest net expense ratio and the highest performance if revenue sharing is put back in. That is what Securian does, and it creates additional value for clients. Not only has our efficient share class selection mitigated plan sponsor litigation and regulatory risk, but our approach helps to minimize fees and expenses, which can enhance returns.
In addition, when our separate accounts reach a certain asset scale, we find that it’s actually cheaper to take those strategies sub-advised. When we do so, we find it to be material enough to actually warrant that migration.
Another benefit available through insurance companies’ separate accounts is that we’re able to capture certain foreign tax credits that would otherwise dissipate; and in capturing those foreign tax credits, Securian takes the extra step of passing those credits back to their separate accounts daily.
We actively manage our open-architecture investment platform. So, as an ever-changing landscape of fund companies come out with new revenue sharing for different platforms, we’re monitoring and actively migrating from one share class to another as those opportunities arise. I think that’s of great comfort to advisers and plan sponsors, because when we tell them there’s a share class that saves them money, and they ask, “What do I need to do?,” the answer is, “We’ve already done it.”
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