Simply Asking Can Help DC Plans Reduce Expenses

In a case of “if you don’t ask, you don’t get” some defined contribution (DC) plans are missing out on lowering fees and reduce expenses by simply not asking according to an elite advisory firm which spells out simple steps that to get fee reductions sometimes just by asking.

While the indirect payment method in DC plans, or so-called revenue sharing, can seem complicated, it is actually quite simple and makes sense but it does take some digging which was helped by the 2012 DOL 408b2 fee disclosure rule. DC services are often provided by different parties especially record keeping and investments spurred by investors desires to use more than a record keeper’s proprietary funds. Imbedded in the cost of most funds are fees to offset record keeping, administrative and sometime advisory services called revenue sharing.

The simple steps suggested by the advisory firm include:

1. Record keepers often offer special share classes for proprietary funds which have lower revenue sharing but you have to ask for them.
2. Though it seems counter intuitive, mutual funds also offer special share classes for certain plans but plan sponsors have to initiate the discussion.
3. Just the threat to remove a fund can cause fee reduction in the form of lower share classes.

But cheaper is not always better. A fund that costs .75% and provides .25% to offset costs could be replaced, for example, by the same fund with a cheaper share class of .65% but has no revenue sharing.

Which all leads to the fact that plan sponsors, usually with the help of their advisor, need to complete three separate reviews of investments and fees which include:

1. What is the reasonable cost to run the plan?
2. What is the revenue sharing within the funds selected and are they generating enough to offset costs or is there a surplus?
3. Are the funds good for the participants and have they passed the plans investment policy screen?

So while asking for cheaper funds may seem like a no-brainer, it’s not the same as asking a service provider to reduce costs. Many plans think that the move to index funds, many of which do not include revenue sharing, will save money but it does not change how much it costs to run the plan.