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

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!!!!!!

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 http://www.morningstar.com/InvGlossary/expense_ratio.aspx

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.

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%

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

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

Pro Rata vs Per Capita vs Blended Example

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

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

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)

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.”

EXAMPLES!!!

Example: Plan With Revenue Share

Example: Plan With NO Revenue Share

Wait! What Happened to the Investment Management Fee?

Example: Plan With ZERO Revenue Share PLUS a Wrap Fee

Example: Plan With Revenue Share and Fee Equalization

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

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

Example of POORLY Constructed Revenue Share

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

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.”

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?

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?

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.

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

Contact Information Eric Dyson, CFP®, AIF® Wellspring Financial Partners edyson@wellspringfp.com 817-403-3136 www.linkedin.com/in/401kguy www.wellspringfp.com