Fee Payment Methods in 401(k) Plans: Know Your Options

A plan sponsor (i.e. employer) can elect to pay or allocate plan fees in a number of different ways, and it is important to understand all available options, as this is a fiduciary decision.

In fact, the DOL observed in Field Assistance Bulletin (FAB) 2003-03 that plan sponsors and fiduciaries have considerable discretion in determining, as a matter of plan design or a matter of plan administration, how plan expenses will be allocated among participants and beneficiaries.¹

All retirement plans incur various fees for the ongoing operation of the plan. Typically, plan fees are allocated or collected through one or a combination of fee payment methods. What follows are brief summaries of these methods.

Billed Fees

A plan sponsor may elect to have all or a portion of the plan’s fees billed. This bill would typically be paid by the plan sponsor. Fees are not allocated among participants and beneficiaries nor are plan assets used to pay these fees. The billed fees are typically included in the plan sponsor’s annual budget for planned expense obligations.

Deducted Fees

A plan sponsor also has the option of electing to have all or a portion of the plan fees deducted from plan assets. In the case of a defined contribution plan, these fees reduce the amount of retirement savings in participant accounts either in proportion to their account balance (pro rata) or as a flat dollar amount.

Asset-Based Fees

A plan sponsor may choose to have all or a portion of the plan’s fees collected as an asset-based fee. This amount is typically expressed as a basis point² and is  collected from participant accounts daily, monthly, or quarterly, depending upon the service provider.

Revenue Shared with Service Provider

The term “revenue sharing” is frequently used to refer to payments that are made by an investment option³ such as a mutual fund, or its investment manager or affiliates, to a service provider for employer-sponsored retirement plans for work in keeping track of the ownership of the investment option and other services. Under securities law, for example, revenue sharing payments from mutual funds may be called sub-transfer agency fees and/or administrative service fees. In the retirement-plan world, the phrase “revenue sharing” may be used to refer to those payments. It is important to note that not all investment options use the term “revenue sharing” as a description of these, or similar payments.

This fee payment method involves having all or a portion of the plan fees collected through revenue sharing. Various share classes or rate levels may be available to offset greater or lesser portions of the plan fee.

It’s important to note that there is no one right fee payment method. ERISA contains no provisions that specifically address how plan expenses are to be allocated among participants and beneficiaries.⁴ Moreover, there is no regulation from the DOL that states any of these options are required or that one option is considered more prudent than the others.

¹Field Assistance Bulletin 2003-03.
 ²A basis point is one-hundredth of a percentage point (0.01%). Basis points are used as a uniform measure or expression of various retirement plan fees and investment expenses, as a percentage of asset values. The relationship between percentage and basis points can be summarized as follows: 1% = 100 basis points and 0.01% = 1 basis point.
³Investment options may include mutual funds, insurance company separate accounts, collective investment trusts and other investments.
⁴Field Assistance Bulletin 2003-03.
This article is an excerpt of a paper, A Closer Look at Fee Structures: What you may not know about fulfilling your fiduciary duty, originally published by the Principal Financial Group® in September 2013 Thought Capital – Understanding Fee Methods.
Securities and investment advisory services are offered solely through registered representatives and investment advisor representatives of Ameritas Investment Corp. (AIC), a registered Broker/Dealer, Member FINRA/SIPC and a registered investment advisor. AIC is not affiliated with Summit Group of Virginia LLP or Principal Financial Group ®. Additional products and services may be available through Summit Group of Virginia LLP that are not offered through AIC. Representatives of AIC do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation.

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