Two questions to answer when evaluating your Taft-Hartley retirement plan expenses

As a Taft-Hartley plan sponsor, you have an obligation to understand your defined contribution (DC) plan expenses. But your duty as a fiduciary goes even further: You also have to understand how your participants are paying the plan’s expenses, and you may need to adjust your methods to be sure you’re allocating the expenses in an equitable manner.

Like all plans governed by ERISA, Taft-Hartley retirement plan sponsors have a duty to manage the payment of plan expenses. There are several categories of plan expenses, which may include:

  • Administrative (by the fund office or third-party administrator (TPA))
  • Recordkeeping
  • Investment advice
  • Consulting
  • Legal
  • Audit
  • Insurance
  • Print, mailing, and fulfillment of notices
  • Miscellaneous expenses

In contrast to single-employer plans, Taft-Hartley DC plans don’t have a corporate bank account that can be used to pay plan expenses. Typically, all plan expenses are paid directly from the plan—which means they’re paid by the participant accounts. As a result, fiduciaries are required to understand how the plan’s expenses are being paid and, in turn, how they’re being allocated and reported to members.

How are my Taft-Hartley retirement plan expenses being paid? 

There are several ways to have participants pay plan expenses, the most common of which are listed below.

 

How participants pay plan expenses

Potential impact to participants 

Revenue sharing

Recordkeepers have revenue-sharing agreements with the managers of the funds offered by the plan. These agreements dictate a percentage of the investment’s earned income that’s paid directly to the recordkeeper. Each of the plan’s investments may have different levels of revenue sharing. As a result, participants’ share of the plan’s administrative expenses depends on the investments they’ve chosen.

There are a few items to consider with revenue sharing:

1  Revenue sharing isn’t readily understood by most participants, and it’s not always transparently communicated.

2  Because each investment could have a different revenue-sharing agreement, participants with higher balances will be paying more in administrative expenses.

3  Because each investment could have a different revenue-sharing agreement, it’s a lot for a participant to try to understand and track.

Per participant fees

Plans can charge each participant a standard dollar amount. 

Depending on the dollar amount, this can overly burden new members who have lower account balances.

Asset-based fees

Plans can charge each participant a standard percentage of the account balance. 

This can overly burden members with high account balances.

Are my Taft-Hartley retirement plan expenses being allocated fairly? 

In recent years, plan expenses and the ways they’re being allocated and paid have come under fire.

  • The U.S. Department of Labor has called for more transparency.
  • Class action lawsuits for excessive fees have increased risk for plan fiduciaries.
  • Plan sponsors want more insight and transparency around fees.
  • Participants want more transparency into plan expenses.

In this environment, fiduciaries need to evaluate how they’re allocating plan expenses to ensure they’re doing so in an equitable manner. Two ways to allocate plan expenses are through fee levelization and direct debiting of account balances.

What's fee levelization?

Fee levelization means aligning your plan’s investments with their revenue-sharing arrangements independent of the agreements your recordkeeper and the investment manager have established. It’s one way retirement plans can solve for some of the inequities that used to come from participant-directed investment selection. Some participants choose funds that have greater revenue share and, as a result, pay a greater portion of the plan’s fees, while others choose funds with lower revenue share. A simple way to help accomplish fee levelization is to select a fund lineup with investments that don’t share revenue—with all participants paying no revenue share toward the plan’s expenses.

Per participant or asset based—that’s the next question

Whether or not you choose to levelize your plan’s investments, you must still decide how to charge your remaining plan expenses to the participants: as a percentage of each account or an equal dollar amount for all. And although each method places a burden on different groups of participants, it’s up to you to make the judgment call for which one is best for your overall membership.

This decision doesn’t need to align with how your plan’s fees are calculated. For example, if your recordkeeping fee is calculated as per participant, you can still collect fees as a standard percentage of each participant’s account. 

Understand your retirement plan’s expenses

Taft-Hartley plans, by their nature, must pay plan expenses by charging participants. Fiduciaries have a duty to be sure they understand how those expenses are being allocated and whether the method is equitable. Fee levelization and direct debiting are related but independent decisions. To keep the first part of the process simple, you may decide that leveling the fees in your investment lineup can put everyone on the same playing field in terms of revenue sharing. But you still have to decide which expense allocation method makes the most sense for your membership. And make sure to perform ongoing reviews—you don’t want to collect too much or too little—and if you collect too much, remember to spread back the excess once per year.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.

 

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