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2. What’s all the buzz about fee levelization?
Considerations for plan sponsors
Hello and welcome.
How often do you discuss retirement plan fees? If you’re like most, it’s probably a lot. One of the toughest parts of your job as a retirement plan sponsor is managing your fiduciary duties. Recent litigation1 and regulations have certainly heightened awareness of fiduciary responsibility so the conversations aren’t likely to stop anytime soon.
Here’s the thing. There’s no one right answer when it comes to retirement plan fees and allocation. That’s why it’s important to know your options and have a repeatable, defendable process in place. We’re here to help make your job a little easier and help you better understand your fiduciary obligations around plan expenses.
1 401(k) Fee Litigation, Groom Law Group, September 2015
Presenter
Title

3. What’s in it for you?
The current landscape: how fees are collected and common concerns
Understanding the various fee levelization options
Steps to help you build a prudent process
We want to help make your job a as a fiduciary a little easier. Let’s take a closer look at this growing trend, the basics of fee collection, details about your possible options and how you might determine the right approach for your plan and participants.

4. The current landscape How (and why) fees are collected
What do they cover?
Recordkeeping and administrative services
Investment management
Advisory services
Auditing, accounting, etc.
With heightened awareness of fiduciary responsibility, it’s important for you to have a thorough understanding of retirement plan fees and how those fees are paid. Let’s do a quick refresher on the basics of why and how fees are collected.
Retirement plan fees cover administrative activities performed by the plan service provider. Fees also pay for the resources and services available to help plan participants enroll and take steps to help them reach their retirement savings goals. Think of things like the call center and website.
Government reporting and legal services
Trust/custody services
Participant communication and education

5. It’s more than a number Identify all components of plan fees
Understand breadth, depth and quality of services
Compare cost versus services
When it comes to understanding retirement plan fees, it’s more than a number. Here’s information you need to know as you look at the plan fees:
Identify ALL the overall fees being paid for the retirement plan and the individual components that make it up — like administrative/recordkeeping services, investment management and any financial professional services.
Understand the breadth, depth and quality of services being received for fees — fees of 401(k) and other plan types vary greatly due to unique plan characteristics; plan/investment design; and range, quantity and quality of services negotiated between the plan sponsor and retirement service providers.
Compare costs versus services — are the fees within a reasonable range for your plan for the services you expect (e.g., do you expect your service provider to do more for the plan or do you expect your staff to do much of the work, leaning less on your service provider? Is your goal for the plan improving outcomes for participants?)

6. Fee allocation ERISA requires plan fiduciaries to:
Understand fees the plan pays
Understand the reasonableness of those fees
Understand and decide how fees are paid to service providers
According to industry expert Fred Reish, how to allocate fees and revenue sharing are fiduciary decisions that many committees fail to vet through a prudent process — but should.1
Because there’s no one right answer when it comes to fee payments and allocation, a repeatable, defendable process is needed.
ERISA (Employer Retirement Income Security Act) requires a plan fiduciary to not only understand the fees a plan pays and the reasonableness of those fees, but fiduciaries are also required to understand and decide how such fees are paid to service providers.
According to Fred Reish, based on his firm’s experience, how to allocate costs and revenue sharing are fiduciary decisions that many committees fail to vet through a prudent process — but should.1
1 Fred Reish, Chair, Financial Services ERISA Team, Drinker Biddle, PLANSPONSOR Magazine, August 2015
1 Fred Reish, Chair, Financial Services ERISA Team, Drinker Biddle, PLANSPONSOR Magazine, August 2015

7. Payment methods Revenue sharing Billed fees Deducted fees Asset-based
There are a few ways to cover plan administrative fees. You’re probably familiar with one of the most common, revenue sharing. This allows you to collect all or a portion of the plan fees implicitly through the plan investment options.
When this approach isn’t used or it doesn’t cover all of the plan administrative expenses, fees can be billed directly to the plan sponsor or paid from participant accounts. Let’s look at these other options:
Billed fees are typically paid by the plan sponsor and included in the plan sponsor’s annual budget. Fees are not allocated among participants and plan assets are not used.
Deducted fees allow plan sponsors to have all or a portion of the plan fees deducted explicitly from plan assets shown as a dollar amount. 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 or as a flat dollar amount.
Asset-based fees allow a plan sponsor to collect all or a portion of the plan fees explicitly from participant accounts. This amount is generally determined by a basis point and collected monthly.
Also, it’s important to point out that these payment methods aren’t mutually exclusive. It’s not uncommon for a plan sponsor to use some revenue sharing and some asset-based fees to cover total plan fees.

8. Revenue sharing and participants%
0.50
0.40
0.30
0.20
0.10
Comparison of plan fees paid by participants
Revenue sharing amounts vary, meaning some participants may pay different proportions of the plan’s fees.
0.49%
0.35%
0.30%
0.21%
Revenue sharing is the most common fee allocation approach in the industry today.1 Revenue sharing from certain investment options is often used to offset plan administrative expenses on an investment-by-investment, account-by-account basis. Because of this, participants pay for some or all of the recordkeeping or plan administrative fees through the investments that they select.
But as you can see with this illustration, the amount of revenue sharing can vary from one option to the next — meaning participants may pay different proportions of the plan’s fees.
So, think about purchasing airfare, for example. You purchase a ticket from point a to point b. You might pay more for your ticket than the person sitting next to you simply because there were less seats available at the time of your purchase. You’re flying in the same plane, sitting in the same type of seat and getting to the same place, yet you paid more. Is this fair? This is the same question plan sponsors are raising in the 401(k) space. Many believe it’s not fair participants have different fees based on different investments.
This has raised concern among plan sponsors who want to level the playing field and allocate plan administrative fees equally among plan participants.
1Deloitte Annual Defined Contribution Benchmarking Survey, August 2015.
0.00%
John
Investment A
Mary
Investment B
James
Investment C
Ashley
Investment D
Robert
Investment E
For illustrative purposes only.

9. Fee levelization A growing trend
75% of plan sponsors anticipated to implement fee levelization by 20191
More than 2/3 of plan sponsors
very likely to review their plan expenses and revenue sharing2
As a result of these concerns, there’s a lot of talk in the industry about levelizing fees. And for good reason, as recent litigation1 and regulations have highlighted investment expenses and revenue sharing as important issues.
By 2019, industry experts anticipate three-quarters of plan sponsors will have implemented fee revenue levelization strategies so that participant cost is independent of investment elections.2
More than two-thirds of plan sponsors very likely to review their plan expenses and revenue sharing in
In fact, 1/3 of plan sponsors recently restructured fees more equally among participants…and another 39% say they’re likely to do the same. 3
1 401(k) Fee Litigation, Groom Law Group, September 2015
2 Prescient Perspectives on the Road Ahead, NAPA.net, December 2015; according to 71% of a diverse group of retirement industry experts
3 AON Hewitt Hot Topics in Retirement, January 2016
1/3 of plan sponsors recently restructured fees more equally among participants …
… and another 39%
say they’re likely to do the same2
1 Prescient Perspectives on the Road Ahead, NAPA.net, December 2015; according to 71% of a diverse group of retirement industry experts
2 AON Hewitt Hot Topics in Retirement, January 2016

10. What fee levelization options are available?
The goods news is that many service providers now offer numerous options to allocate fees, which gives the flexibility to select the one that works best for your plan and participants. 10

11. Fee levelization options
Zero revenue sharing investment options
Zero revenue sharing through fee credits
Revenue sharing with fee adjustments
For a simple way to allocate retirement plan fees equally among participants, consider these fee levelization approaches. They give you flexibility to select the method that best meets the needs of the plan and participants.
Zero revenue sharing approach: where revenue sharing is not used to pay plan administrative fees
Zero revenue sharing investment options — investment options that provide no revenue sharing
Zero revenue sharing through fee credits — crediting all revenue shared from investment options back to the participants
Revenue sharing with fee adjustments — applying a positive or negative fee adjustment to the revenue sharing of each investment option to achieve the agreed upon rate needed to pay for plan recordkeeping and administrative fees
Let’s take some time digging into the details of each approach and how they work…
Offering investment options that provide no revenue sharing
Crediting all revenue shared from investment options back to the participants
Applying a positive or negative fee adjustment to the revenue sharing of each investment option to achieve the agreed-upon rate needed to pay for plan recordkeeping and administrative fees 11

12. Zero revenue sharing investment options
How does it work?
Revenue sharing from selected investment options
John:
Mary:
James: 0%
John:
Mary:
James:
Same admin fee for all participants
0.30%
Let’s take a look at zero revenue sharing investment options:
So, how does this work? Here, in Option 1, with a zero revenue sharing approach, you can see that it creates levelized or equal revenue sharing since each investment option produces the same rate of revenue sharing (zero). The result … plan administrative fees are charged separately and all participants pay the same proportion of plan administrative costs.
Plan admin fees charged separately; all participants pay the same proportion
Result
For illustrative purposes only.

13. Zero revenue sharing investment options
Clear separation of fees
Easy to understand
May include investment options with lower fees
Simple, clean participant communications
Not all investment managers have complete series of zero revenue available
Plan sponsors can choose how to allocate their fees
OK, how do you determine if this approach is right for your plan and participants? Well, here are things you will want to consider as you look at this particular approach:
• Separates recordkeeping fees from investment expenses, making both easily identifiable to plan participants and fiduciaries.
• Easy to understand.
• May include investment options with lower fees.
• Results in simple, clean participant communication. Participant fee disclosures only include: plan investment expense ratios, any deducted or asset-based plan fees and participant transaction fees.
• May narrow the universe of investment options the plan fiduciary can select because not all investment managers have complete series of zero revenue available.
• Plan sponsors can choose how they want to allocate their fees.
So when might you use this approach? Generally speaking, this approach is used if you want to accomplish a clear separation of plan administrative and recordkeeping fees from investment expenses via the simplest method. It works well if your current investment options have a z-rate share class available or would require minimal changes to the investment lineup to include investment options with a z-rate share class. Or if you’re looking to make changes to your organization’s investment lineup, for example when switching to a new service provider, this is also an excellent time to look at moving to a zero revenue share class.
Considerations

14. Zero revenue sharing through fee credits
Option 2
How does it work?
Revenue sharing from selected investment options
Revenue sharing credited back to participant
Same admin fee for all participants
John:
Mary:
James:
0.30%
0.49% 0%
-0.30%
-0.49% 0%
John:
Mary:
James:
0.30%
Now let’s look at a second way to accomplish a zero revenue sharing approach — zero revenue sharing through fee credits (or credit all).
In this illustration, any revenue sharing within an investment option is credited back to the participant to accomplish zero revenue sharing. Plan administrative fees are charged separately and all participants pay the same proportion of plan administrative costs.
So, in this example, John invested 30 bps and he receives 30 bps back. Mary receives her 49 bps back, etc. Each participant is then charged separately the same amount to cover the administrative fees for the retirement plan.
In reality, here’s what’s happening. All revenue sharing is credited back to the participants, then the same administrative fee is being charged to each participant.
(no
change)
Result
All revenue sharing is credited back; all participants pay the same proportion of plan admin fees
For illustrative purposes only.

15. Zero revenue sharing through fee credits
Clear separation of fees
Easy to understand
May include investment options with lower fees
Investment flexibility
Disclosure of fee adjustment required
How often does the service provider calculate the fee credit?
Again, there are some considerations you’ll want to think through with this approach, including:
• Separates recordkeeping fees from investment expenses, making both easily identifiable to plan participants and fiduciaries.
• Easy to understand.
• May include investment options with lower fees.
• Investment flexibility to choose options that may best meet participant needs because a larger universe of investment options may be available.
• Requires disclosure of the fee adjustment rate and actual fee adjustment as a dollar amount applied to the participant’s account.
• How often does the service provider calculate the fee credit? Revenue sharing fees are collected daily on the account balance. If the fee credit is only made monthly, this could result in a portion of the participant’s account being unable to earn market returns.
So when might you use this approach? This might be a good option if you want to create a clear separation of administrative expenses and investment expenses, but have a need for more investments offered than what is available at a z-rate level.
Considerations

16. Asset-based fees vs. flat dollar fees
Impacts
# Impacted
Considerations
Asset-based fee
Flat fee
Largest account balances
Small account balances
172 have >$44k
508 have <$44k
Plan characteristics
Plan assets
$30M
Participants
680
Average account balance
$44k
In most situations where a zero revenue sharing approach is used, fees will be allocated explicitly to participants (unless the plan sponsors covers the fees). So there are some things to think through when considering whether to use asset-based fees or flat dollar fees.
Asset-based fees will result in different dollar amount charged based on the size of the participant’s account. While equal in proportion to their account balance, participants with higher account balances pay more of the plan’s fees. The plan fiduciary may want to consider the appropriateness of this type of disparity.
But that doesn’t necessarily mean a flat dollar fee is better. With fees allocated as a flat dollar amount, those with higher account balances pay less in proportion to their accumulated assets, while those with lower account balances pay more in proportion to their accumulated savings. Plan sponsors should consider the impact a flat deducted fee might have on the savings behavior of a newly eligible participant, or participants with a low account balance.
To dig a little deeper, look at the plan’s participant data to see how many participants would be impacted. The plan’s average account balance is typically the breakeven point for when a participant would be paying the same out of their account whether fees were allocated as a basis point or flat dollar amount. It can help to understand how many participants fall above and below the breakeven account balance to assess if one method impacts more participants than another.
Let’s take a look at an example…
[Read plan characteristics]
In this plan, 172 participants have account balances above the plan’s average, while 508 fall below the average. This means choosing to allocate fees as an equal dollar amount to all participants would impact more participants and the plan sponsor may want to consider allocating fees as an asset-based fee.
For illustrative purposes only.

17. Asset-based fees vs. flat dollar fees
Impacts
# Impacted
Asset-based fee
Flat fee
Largest account balances
Small account balances
154 have >$94k
140 have <$94k
Plan characteristics
Plan assets
$27.7M
Participants
294
Average account balance
$94k
Let’s look at another example…
[Read plan characteristics]
In this plan, 154 participants have account balances above the plan’s average, while 140 fall below the average. In this case, the plan sponsor may want to consider allocating fees at an equal dollar amount to all participants.
For illustrative purposes only.

18. Revenue sharing with fee adjustments
Option 3
How does it work?
Revenue sharing from selected investment options
Positive or negative fee adjustment applied
Same admin fee for all participants
John:
Mary:
James:
0.30%
0.49% 0% 0%
-0.19%
+0.30%
(no
change)
John:
Mary:
James:
0.30%
Finally, let’s look at a third fee levelization approach — revenue sharing with fee adjustments (or debits and credits). This approach allows you to offset plan expenses through revenue sharing, but still allocate fees equally to participants.
Fees can be allocated equally among participants by applying a positive or negative fee adjustment to the revenue sharing of each investment option to achieve the agreed upon rate needed to pay for recordkeeping and administrative costs. This fee adjustment can also be referred to as a debit or a credit to the participant’s account.
In this example, there’s a true-up that occurs so that all participants are paying an equal amount of 30 bps for plan administrative services regardless of the investment option that they’ve chosen to invest in. If you look at the first participant, John, he’s selected an investment option that’s already providing 30 bps of revenue sharing. No adjustment is needed for him. James, however, elected an index fund that has 0 bps of revenue sharing, so he receives a debit of 30 bps to bring him up to 30 bps. The opposite is true for Mary. She’s paying 49 bps of revenue sharing through the investment option she selected, so she will see a credit of 19 bps.
So again, putting this in a real life scenario. Plan participants will see either charges or credits on their statement. Every participant statement will look different depending on their organization’s investment lineup.
Positive or negative adjustments applied; all participants pay the same proportion of plan admin fees
Result
For illustrative purposes only.

19. Revenue sharing with fee adjustments
Plan sponsor can offset plan expenses but still allocate fees equally
Investment flexibility
Recordkeeping fees not clearly separated from investment options
Disclosure of fee adjustment required
How often does the service provider calculate the fee adjustment?
And, yes, there are some considerations for using this approach:
• Allows plan sponsor to offset plan expenses through revenue sharing but still allocate plan admin fees equally to participants.
• Investment flexibility to choose options that may best meet participant needs because a larger universe of investment options may be available.
• Recordkeeping fees are not clearly separated from investment options and may not be as transparent to participants.
• Requires disclosure of the fee adjustment rate and actual fee adjustment as a dollar amount applied to the participant’s account.
• How often does the service provider calculate the fee adjustments? Revenue sharing fees are collected daily on the account balance. If the fee adjustments are only made monthly, for example, this could result in a portion of the participant’s account being unable to earn market returns.
So when might you use this approach? This approach could work if you aren’t concerned about separating plan administrative and recordkeeping fees from investment expenses. Instead, you’d like your plan expenses to be offset through revenue sharing but are concerned with allocating fees equally to participants.
Considerations

20. What’s the right approach?
Steps for a prudent process
So, what’s the right approach for your plan and participants?
Every plan sponsor and every plan looks a little different. When it comes to fee payments and allocation, there’s no one right answer. The DOL makes it clear the decision doesn’t have to benefit all participants equally.1 But, regardless of the payment method selected, the plan fiduciary should provide a rational basis for the chosen approach.
By knowing and reviewing various options, you can feel more confident in determining the best approach for your organization’s plan demographics and meeting your related fiduciary duties.
1Field Assistance Bulletin 2003‐03 20

21. Evaluate the effects
The DOL offers two primary principles for making a fee allocation decision:
Consider the interests of different classes of participants
Determine how the allocation method may affect each class
The allocation of plan expenses among participants is considered a fiduciary act, which means the plan fiduciary needs to act prudently.
The DOL offers two primary principles to help guide plan committees as they make fee allocation decisions:
Consider the interests of different classes of participants
Determine how the allocation method may affect each class

22. Evaluate the effects Knowledge of investment-related fees
Election of investment options
Account balances
Understanding of plan fees
As a plan fiduciary, you should gather and analyze the facts to make an informed and reasoned decision based on participants’ account balances, understanding of plan fees, knowledge of investment-related fees and election of investment options.
For example:
As we discussed earlier, it’s important to look at the highest participant account balances and the lowest participant account balances. Does one fee collection method favor one group over another? How will the fee collection method impact participant deferral and investment behavior?
The sophistication level among participants may vary significantly. Part of a fiduciary’s role is to establish whether participants are sophisticated enough to understand the concepts of the approach selected. A key purpose of ERISA 404(a)(4) disclosure notice is to make plan fees clear to participants.
The plan fiduciary should weigh the interests of participants who invest in investment options with high revenue sharing payments relative to those who invest in non- or lower-revenue sharing investments.
And remember, the DOL makes it clear the decision doesn’t have to benefit all participants equally.1
1Field Assistance Bulletin

23. Then, document your process
Considerations for a prudent process: 1
Gather and evaluate facts, including participant needs 2
Assess available fee payment methods 3
Determine fee collection and document process
Regardless of the payment method selected, the plan fiduciary should provide a rational basis for the chosen approach. And the plan fiduciary should both understand and document the process used to arrive at that decision. 4
Provide clear, simple participant communication 5
Monitor

24. Best practice Fee policy statement The purpose of the plan
Fiduciary responsibility relating to fees
Monitoring and evaluating the reasonableness of fees
Fee collection method(s)
Communication of fees to participants
Fee policy statement
Does it seem overwhelming to document all of these details? It doesn’t have to be. One way to do this is by using a fee policy statement, which helps the plan sponsor prudently fulfill their fiduciary obligations around fees and expenses with service providers.
Think of it like an investment policy statement, which gives guidelines on the management of the plan’s investment lineup. Similar to an investment policy statement, a plan is not required to maintain a fee policy statement. But if you’re looking for a way to help meet your fiduciary duties, a well-drafted fee policy statement can be an effective resource. The fee policy statement strengthens the due diligence process and shows that consideration has been given to the reasonableness of fees.
A fee policy statement may include:
The plan’s purpose
Fiduciary duties relating to the plan’s payment of fees
Monitoring and evaluating the reasonableness of fees (e.g., how and when fees will be reviewed in marketplace)
Fee collection method(s) and considerations for determining which method to use
Communication of fees to participants

25. Actions you can take Know your fee allocation options
Discuss your current fee allocation
Adopt fee policy statement
The good news is you’ve already taken the first step toward improving your plan for you and your participants … and that’s educating yourself about the various fee allocation options available and how they might impact your organization’s plan and participants.
Next, you can:
Talk to your advisor and/or service provider about what you like/don’t like about how retirement plan fees are allocated within your organization’s plan today (e.g., Is the current model working for you? What concerns, if any, do you have?). This conversation can help you determine the fee allocation approach that best meets the needs of the plan and your participants – whether that is the method you currently use or one of the methods we discussed today. If you do decide to make a change, we’ll be here to help you implement it and clearly communicate the changes to your participants.
Document, document, document – a great way to do this is using a fee policy statement. It can help simplify and streamline the documentation process and helps show you are prudently fulfilling your fiduciary obligations. We can provide a sample to help get you started.

26. Questions?
Now with the time we have left, let’s open it up for questions. 26

27. Thank you
Thanks for joining us today. And as a reminder, if you have any questions or want additional info, you can contact your local Principal rep. 27

28. Important information
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
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