The Many Faces of Fees

ERISA imposes the fiduciary duty to know all fees and amounts paid by a plan, directly or indirectly, and to determine if they are reasonable.

While some fees are easy to identify, such as those for recordkeeping, administrative and investment advisory services, often there are others imbedded within the mutual fund fee structure itself that are harder to discern. These may include:

• 12b-1 Plan of Distribution: Funds may charge up to 75 basis points for distribution costs and 25 basis points for account service fees against fund assets. These service fees were established to reimburse the fund underwriter, transfer agent or others for costs associated with services provided to shareholder accounts, including staffing, printing/postage, telephone expenses and systems resources.
• Sub-Transfer Agent Fees: These represent a portion of the fund’s transfer agent compensation set aside for shareholder recordkeeping and accounting services. These are the types of services provided by third-party administrators in most defined contribution arrangements.
• Multiple Share Classes: These are an alternative to front-end-load sales charges that compensate distribution and service firms – and one more palatable to the institutional marketplace. Generally speaking, smaller plans wind up in a different mutual fund “class” of the same type fund, frequently paying a higher investment management fee for what is generally the same investment.
• “Wrap” Arrangements, Lifestyle Funds: While not technically in the same category as the foregoing, these approaches involve taking a predetermined package of existing fund offerings – with all their imbedded fees – and applying a separate advisory fee on top of the others for the expertise and “convenience” of the packaging. These additional charges can be substantial.

Today’s plan fee environment makes it incumbent upon fiduciaries to request full disclosure of fees and expenses, how fees break down with services provided, as well as a full explanation of the fees’ recipients.

An Alliance Benefit Group representative can give you a clear picture of all fees associated with your plan and help you monitor this important fiduciary responsibility. Please contact us if you would like more information.