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Tax-Qualified Retirement Plan – Dynamic Cost Structures

Tax-Qualified Retirement Plan – Dynamic Cost Structures. Fred Barstein, Founder and CEO of The Plan Sponsor University (TPSU), recently caught-up with esteemed retirement plan advisor and Certified 401(k) Professional, Mr. Stuart Simchowitz, to discuss the dynamic cost structures associated with running a tax-qualified retirement plan.  Mr. Simchowitz has extensive experience in working with retirement plan sponsors and retirement committees to improve outcomes for plan participants.

Retirement committees spend significant resources in establishing and administering qualified retirement plans in the interest of benefiting plan participants. The topic of fees is front and center for these committees due to the ever-present oversight by the Department of Labor (DOL).  The DOL scrutiny frequently delves into the vagaries of revenue sharing.

Mr. Simchowitz addresses the state-of-confusion that exists in the minds of the plan sponsors when they are tasked with comprehending the service-pricing model which incorporates revenue sharing.  Fund share classes are confusing to begin with and the equation becomes more complex when revenue sharing must be explained.  Is Flat-dollar-pricing the wave of the future?

Full Transcript Here

Fred Barstein:               Fred Barstein with 401kTV, just finished the training program for retirement advisors at [Recors 00:00:14] University. I am here with esteemed advisor, Stuart Simchowitz. Welcome, Stuart.

Stuart Simchowi:          Thank you, Fred. Nice to be here.

Fred Barstein:               Okay if we ask you a few questions?

Stuart Simchowi:          Please.

Fred Barstein:               Very good. As part of our series on Fred Talks, we wanted to ask Stuart a little bit about revenue sharing. Stuart has got 30 plus years of experience in [inaudible 00:00:39] many plants, many assets, a real expert, works day-to-day with plant sponsors. One of the issues that got brought up today is all about revenue sharing and share classes and all 408b2 fee disclosure. I have never met a plant sponsor who really read and understood their 408b2. When I try to explain revenue sharing, their reaction is “Why do you do it that way?” Is that what you’re seeing with your clients?

Stuart Simchowi:          Yeah, we still see it, even with the advent of the disclosure rules back in 2012. There’s not uniformity across these disclosures. Therefore, plant sponsors, participants, and even some at the advisor level have a tremendous difficulty in making sense out of the various disclosures.

Fred Barstein:               As a result to that, how did the clients, client sponsors react?

Stuart Simchowi:          The clients are confused, and invariably, it leaves an air of suspicion out there.

Fred Barstein:               Right.

Stuart Simchowi:          What is being hidden?

Fred Barstein:               Why are you doing this, right?

Stuart Simchowi:          Correct, “Why are we doing this?” Which is a question that I ask of euphemistically in a way of the manufacturers, the fund managers, “Why? Why so many shared classes?”

Fred Barstein:               What is the alternative? What would you propose and what would you tell plant sponsors they should be doing?

Stuart Simchowi:          Today, what we’re doing with plant sponsors on a fairly regular basis, as we move through their annual reviews is trying to get plant sponsors to move almost exclusively to zero revenue share classes. These are clean share classes that have fully disclosed fees and there’s nothing hidden, to the extent though that we can’t find a zero revenue share class that is, let’s say, the cheapest share class because there are still games being played out there. We are looking for that less expensive share class. Sometimes we have to have a share class that has revenue share in it, Sub-TA fees, 12 B1s, and the like, but on a net basis when we recapture those revenues, pay them back to the participant that generated them, that is the cheapest share class.

Fred Barstein:               There’s a misconception that if you go to clean shares, that means the plant sponsor has provided a check, they can pay the expenses directly. That’s not true.

Stuart Simchowi:          No, that’s not true. The investigation management fees are embedded into the expenses of the funds themselves, and those who paid by participants.

Fred Barstein:               Then it could be each participant pays a separate amount equally for the record keeping advisory services, and then it’s shared equally.

Stuart Simchowi:          Correct. We’re also seeing a significant movement to what we call flat dollar pricing, where they may be a base fee for the administration of record keeping, and then a flat-per-head charge by participant.

Fred Barstein:               When your clients do that, they feel better about it, they are  confused?

Stuart Simchowi:          They can understand the bill.

Fred Barstein:               They can actually understand the bill. What a new concept.

Stuart Simchowi:          Exactly, and the participants understand what they’re paying, there’s less confusion, it’s easier for them to understand their total return, in fact, at the end of the day.

Fred Barstein:               Today, we talked a little to about any participants who may be paying less or the same about, but now they actually see that bill and they get confused or upset, like, “Why am I paying this? Didn’t realized it before.” It’s a way to engage that.

Stuart Simchowi:          Correct. It’s a matter of getting them to understand that this is something that they have been paying all along, while, in fact, it has just been hidden from them.

Fred Barstein:               I would be suspicious if my 401k or 403b was free. We realized somebody is doing the work, and I got to get paid.

Stuart Simchowi:          Good, none of us work for free, Fred.

Fred Barstein:               Very good. Thanks for joining 401kTV for our Fred Talks TV, and thank you for watching. Stay tuned.



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