At a TPSU (The Plan Sponsor University) program held at the Universities at Shady Grove in Maryland, Adjunct Lecturer Joe DeNoyior from the Washington Financial Group provides a basic primer on what a defined contribution (DC) plan fiduciary should know about fees. If a plan sponsor does not know about revenue sharing, which is common to most DC plans, there’s a good chance they don’t understand plan fees which can results in higher than needed expenses as well as legal liability.
Joe starts with the basics or best practices concerning revenue sharing which includes:
- Understanding what the fees are
- Making sure that fees are reasonable for services rendered
- Understanding who pays what
DOL rule 408b2 made it easier for plan sponsors to understand the total fees and who is receiving them but some of these disclosures are harder to understand than others. Joe suggests that best practices dictate that plans benchmark fees by going to market periodically and warns, “Cheapest is not always best. The DOL does not require the cheapest fees.” For example, advisors that provide significant education and one on one meetings to foster participant engagement may charge more.
Plan sponsors that understand revenue sharing soon realize that some participants may pay more than their fair share than others above and beyond the fee to manage the money which varies depending on the type of fund. For example, a participant using index fees, which pay low or no revenue sharing, may be getting a free ride from others that use, for example, target date funds (TDFs). There are record keepers that can equalize these fees by putting all revenue sharing in a bucket and charging some participants more while returning money to others.
“Ask until you understand,” cautions Joe DeNoyior, “Because it is your right and responsibility to understand fees.”
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