1. Understanding 401k Fees, revenue and revenue sharing arrangements
To share or not to share?
Eric Dyson

2. Institutional Share Class
Bundled Pricing
Required Revenue
ERISA Budget
Record Keeper
Per head
% of plan assets
Total Cost
RIA
Broker
Commission
Fee only
Advisor
It’s easy, right!?!
Total Plan Expense
Fee Levelization
Pro Rata
Per Capita
Fund Expense
Asset Manager Fee
Revenue Sharing
Active Management
Index Funds
Blended Approach
XYZ Growth Mutual Fund
Institutional Share Class
Revenue Share
No Revenue Share
Retail Share Class
12b-1 Fees
Collective Trust
Best Practices
DOL
Class Action Law Suits
ERISA
HELP!!!!!!

3. Mutual Fund Expense Ratio
Annual Net Expense Ratio This is the percentage of fund assets paid for operating expenses and management fees. The expense ratio typically includes the following types of fees: accounting, administrator, advisor, auditor, board of directors, custodial, distribution (12b-1), legal, organizational, professional, registration, shareholder reporting, sub-advisor, and transfer agency. In contrast to the gross expense ratio, the net expense ratio does reflect fee waivers in effect during the time period, and does not include interest and dividends on borrowed securities. The expense ratio does not reflect the fund’s brokerage costs or any investor sales charges. 1 1

4. Mutual Fund Expense Ratio – AKA What is Revenue Share?
For purposes of our discussion and to simplify; mutual fund expense ratio consists of two primary components:
The investment management fee used to operate the fund and its investment portfolio, and
Additional fees that represent revenue share, which are paid to other third parties
Record keeper
Advisor
ERISA Budget
Mutual Fund Share Classes
Different share classes have different fee structures
The biggest difference in fee structure are the revenue share numbers
It is important to note that investment management fees will not often, but sometimes, be different for different share classes of the same mutual fund.

5. Mutual Fund Expense Ratio - Investment Management Fee and Revenue Share
Class A
Class R1
Class R2
Class I
Investment Management Fee
0.55%
0.60%
Revenue Share
0.25%
0.10%
0.00%
Total Expense Ratio
1.15%
0.80%
0.65%

6. Three Separate Decision Points & One Verification
Plan Admin Costs
Employer pays
Plan Participants pay
Fee Allocation
Level at the participant account level
No Fee leveling
Revenue Share
Use investment options with revenue share?
Use investment options with zero revenue share
Check
Check to verify no potential negative impact on total plan cost

7. Decision Steps 1 and 2 Who Pays Administrative Fees
Decision Steps 1 and 2 Who Pays Administrative Fees?; Level Participant Fees?
Step 1 - Who pays plan administration fees?
Employer (Plan Sponsor), or
Employees (participants)
Reminder that individual participants always bear the cost of investment management.
Step 2 - Is there an effort to provide some sort of “level,” fee structure to participants?
Pro rata, per capita or hybrid?
Will your record keeper facilitate?
For any sort of fee leveling – transactions will appear on statements

8. Pro Rata vs Per Capita vs Blended Example

9. Plan Administration Costs
Participants pay all or some admin fees
No provision for fee leveling
Employees typically do not see this fee on statements.
Pro rata fee leveling
Employees will see a fee on their statement
Per capita fee level
Hybrid fee leveling
Employer Pays All Plan Admin Expenses
Process and Decision are DONE. No admin fee to participants. No revenue sharing necessary.
Proceed to revenue share decisions

10. Decision Step 3 and Verify Use Revenue Share or Not
Decision Step 3 and Verify Use Revenue Share or Not? Verify any Changes to Total Plan Costs
Note that Decision Step 3 can be made as a priority above the decision to level participant fees. If a decision is made to allow no revenue share AND the Plan Sponsor is NOT paying for all administration costs, then it simply becomes a decision as to how to deduct administration fees from employee’s accounts.
Pro rata
Per capita, or
Blend
Step 3 – Use revenue share or not?
Finally - verify any changes to total plan cost

11. Step 3 – Use of Revenue Share or Not?
If no fee leveling used, then check how fees are currently allocated?
Decide on participant fee structure
Pro Rata:
Can simply add wrap fee to some funds
Results in a net debit OR net credit to each participant
Per capita:
Fixed dollar amount per year (qtr) deducted
Results in either multiple debits or credits and debits
Blended:
Combination of Pro Rata & Per Capita
Results in multiple debits or credits and debits
No Revenue Share
Decide on participant fee structure (No revenue credits)

12. Final Step – Verify Any Changes to Plan Cost
In most cases there will be little to no change in total plan cost
In many cases there will be small changes to total plan cost
In some cases the affect on total plan cost will warrant discussion
In all cases impact on total plan cost should be documented and verified to be “in the best interests of the participants and their beneficiaries.”

13. EXAMPLES!!!

14. Example: Plan With Revenue Share

15. Example: Plan With NO Revenue Share

16. Wait! What Happened to the Investment Management Fee?

17. Example: Plan With ZERO Revenue Share PLUS a Wrap Fee

18. Example: Plan With Revenue Share and Fee Equalization

19. Verifying Total Plan Cost WITH Revenue Share to NO Revenue Share Plus a Wrap

20. Verifying Total Plan Cost WITH Revenue Share to NO Revenue Share Plus a Wrap

21. Example of POORLY Constructed Revenue Share

22. Thoughts for Consideration
What are best practices from a fiduciary exposure standpoint?
Anytime the Plan Sponsor pays plan administration and service fees then risk exposure is reduced.
Have you minimized the investment management fee?
If you are using revenue share do you understand COMPLETELY:
How it is used?
The impact on individual participants
The impact on plan cost
Nowhere does ERISA require a plan to have the lowest possible fee. It requires that fees be commensurate with services provided.
Recordkeepers and advisors vary in fee level and level of service provided
Differences in service level for investment management services will be very small

23. Thoughts for Consideration
Class action lawsuits regarding defined contribution fees continue. They will most likely continue because they are very lucrative and profitable for the firms that litigate these cases.
How does an Investment Policy Statement (“IPS”) impact this decision process?
It is possible that there is impact.
Example: an IPS might be written that prohibits funds with revenue share
If you plan to make a change to the participant fee structure; realize that you need a proactive strategy to communicate to employees.
Taking an approach to avoid having to communicate a message to employees will rarely be “in their best interest.”

24. Next Steps – Check List Gather the following documents:
Plan level statement
404(a)5 – Participant-Level Fee Disclosure
408(b)2 – Covered Service Provider Fee Disclosure
Benchmark your service provider fees if not done so recently
Recordkeeper
Advisor
Auditor
Attorney
Determine how much revenue share is being generated in the plan
Evaluate how revenue share is utilized in each investment option
Is a different share class option better for your plan?

25. Next Steps – Check List
Setting revenue share aside do you have the least expensive share class option in your plan based on the investment selected?
Determine how much per person (on average) you are paying in recordkeeping fees
Determine how much variance there is in cost to each participant in recordkeeping fees
Will your current recordkeeper allow you to assess participant fees the way your committee would like to?

26. Summary
Understanding defined contributions fees and revenue share is a required element of fiduciary responsibility under ERISA
Defined contribution investment option fees, can be simplified into two generalized categories; investment management fees and revenue share.
If the Plan Sponsor pays all administrative fees then fiduciary risk exposure is minimized.
If Plan Sponsor will not pay all fees then a careful evaluation must be made into:
The use of revenue share or avoidance of revenue share arrangements
How fees are assessed to participant accounts and whether fee leveling should be used.

27. Summary Consider a three step decision process with a fee verification
Decision 1: Plan Administrative Fees
Plan Sponsor pays all administrative fees or
Some or all fees will be passed onto the plan participants?
Decision 2: Level Participant Fees
No effort to level fees equitably across participants
Ensure fees are level and equitable across all participants:
Pro rata
Per capita
Hybrid
Decision 3: Use of revenue share
Use funds with revenue share
Use funds with no revenue share
Verify that there is no negative impact on total plan cost

28. Contact Information
Eric Dyson, CFP®, AIF® Wellspring Financial Partners