The Form 5500 deadline of October 15th has recently passed and we here at SLD are taking a deep breath (phew!) and relaxing a bit after completing over 100 employee benefit plan audits before the deadline. Most of us take advantage of the less hectic schedules to catch up on business reading and continuing professional education. In doing this, I came across an article entitled, “Many Small-Business Leaders Express Limited Knowledge of Retirement Plan Fees,” by The Pew Charitable Trusts. The basis of the article was a May 2018 survey conducted by Pew.
The survey addressed questions to small and midsize business leaders regarding familiarity with their retirement plan fees and the related fee disclosure notifications. Some key results were:
- Only 19% of respondents indicated they were “very familiar” with their retirement plan fees.
- Approximately a third of respondents, 34%, indicated they were “not at all familiar” with the plan fees.
- While 49% said they had read and understood the plan’s fee disclosure information, 44% said they had not read it.
- Respondents were evenly split as to whether additional information about fees would be useful.
The article then went on to discuss various initiatives to improve the fee disclosure information to make it more transparent and easier to understand.
The results of the survey came as no surprise to us. In our audit process, we have discussions with plan sponsor management and review the fee disclosure notifications. Therefore, we are well aware of how complicated fee arrangements can be and how difficult it is to understand the disclosure information.
It is also evident to us that a large number of plan sponsors do not completely understand the fee arrangements in place. This makes it difficult for them to meet their fiduciary responsibilities to ensure only “reasonable” fees are paid by the plan. Sponsors can be personally liable, so a good understanding of the plan fees is critical.
Although the Pew article did not directly endorse simplifying the fee disclosures as the best way to help sponsors improve their knowledge about plan fees, it was the only “solution” discussed, which could lead one to assume Pew believed so.
While an effort to simplify the fee disclosures may be a worthy effort, there may be better ways to help sponsors understand the fees being paid. For example, simplifying the fee arrangements would address the root problem. If the fee structure is complex, the details will never be easy to comprehend. Less complex and more transparent fee arrangements would be easier to describe in the disclosure notifications and be more readily understandable. With more clarity, the sponsors would be able to assess the plan fees better and, therefore, be better able to keep plan costs at a reasonable level.
We recommend this very strategy to our clients, suggesting that they keep things simple and utilize providers (e.g. record keepers, third party administrators, custodians, advisers, etc.), who charge only direct fees. Three common characteristics of simple, direct fee arrangements include:
- No revenue sharing.
- Utilization of low cost share classes of mutual funds or other low cost funds, such as collective investment trusts.
- Administrative service providers who charge direct fees based on participant headcount, not assets in the plan.
While it may appear that this recommendation would be readily embraced, this is not always the case. When a sponsor has been utilizing complex arrangements for a long period of time, inertia may make any change difficult. Additionally, some companies prefer more complicated arrangements because costs can be pushed to the participants in a non-transparent manner. In a direct arrangement, the fees charged to participants are shown as a direct charge to the participant’s account and are, therefore, more transparent. Even if the participants end up paying less, the transparency makes it more likely that they will complain. However, this issue can be addressed with participant education.
In summary, we recommend keeping fee arrangements simple. If the service fee arrangements are simple, the related disclosures will also be easier to understand. This will enable plan fiduciaries to meet their responsibilities with respect to ensuring the fees paid by the plan are “reasonable.” If the arrangements are complicated, the related disclosures will be difficult to understand—no matter the effort to “simplify” them.