Plan Fees: Why Retirement Plan Providers Love Revenue Sharing and Basis Points!

This post is historical and based on information that was current at the time of initial print. It contains information that has changed. Staff and business names may have changed.

Imagine a world where you never had to bill your clients, your fees drip into your bank account in daily increments that no one sees, and your revenue continues to grow while your service model stays the same.  Welcome to the world of revenue sharing and basis point pricing in retirement plans!

For years retirement plan providers have provided all-in pricing with the bulk of the fees either buried in a mutual fund expense ratio or a “wrap” charge in a group annuity.  Plan sponsors were attracted to this model because there were no bills to pay.  Some providers wrongly even characterized their services as “free.”  Many plans grew in size which resulted in substantial pay increases to plan providers since as the assets of their plan grew, so did their fees.  These fees were coming out of participant accounts and significantly reduced participant balances that they otherwise would have accumulated.

Revenue sharing and basis point pricing still goes on today, and the fiduciary plan sponsor must monitor these fees to make sure they are reasonable, fair, and provide value to participants.

Plan service fees can be broken down into three main categories:

  1. Investment fees: Fees paid for the management of the assets.  These fees almost always are asset-based and paid by participants.  There can be significant differences in the amount of these fees which requires a careful assessment of what you are paying and what you are getting for it.
  2. Advisor, Adviser and Broker fees: Many plans have some advisement on their plan, and in most cases, these fees are paid in basis points or as a % of assets.  There are vast differences in the charges and the services provided in this area.  It is essential to understand precisely what participants are paying and what services you/they are getting to make sure it is fair and reasonable.
  3. Recordkeeping and Administration fees: These fees are for the recordkeeping platform, website access, participant accounting, compliance testing, and 5500 preparation.  When plan assets continue to grow the cost for this service can get seriously out of whack with what is fair and reasonable pricing for participants.

As a plan sponsor, you should know who is getting paid what, and that in each of these three service areas your participants are only paying a fair price for the services that they are receiving.

It is okay to have fees derived by basis points and taken out of the plan assets as long as you are continually monitoring the charges and renegotiating the fees on an on-going basis.  You should benchmark your plan at least every three years to make sure your fees are fair.

Other strategies to deal with this issue include:

  • Ask plan providers to agree to a fee structure based on a set dollar amount rather than a percent of assets.
  • Pay some portion of the fees with corporate dollars rather than out of the plan.
  • Negotiate a cap fee at a maximum dollar amount.
  • Remove all revenue sharing and use “clean shares” where only the cost of fund management is in the expense ratio, and there is no revenue sharing. All other fees get billed separately.