Published on: August 9, 2018
As a child I often heard my dad saying, “What’s fair isn’t equal and what’s equal isn’t fair.” Most times he said this in response to my complaints about the unfairness of something I was having to do (usually centered on chores I had to do that my sisters did not). I always thought that was a dumb statement because it meant I wasn’t getting out of my chores, but as I’ve grown older I have seen the truth in what he said. Fairness and equality are rarely synonymous.
When it comes to the fees and expenses associated with your retirement plan both fairness and equality must be considered when determining the reasonableness of the plan’s pricing. In recent years most plan sponsors have focused almost entirely on whether their plan was priced fairly. This has been accomplished for the most part through advisors and recordkeepers soliciting business based on lower total cost and to a lesser extent through fee benchmarking. While ensuring that a plan is fairly priced is important, what’s lost in many of these comparisons is the fee structure, which addresses the who, what and how the fees and expenses are paid. This is the equality component of reasonableness.
Broadly speaking, there are two types of expenses in a retirement plan, investment expense and administrative expense. Investment expenses are directly related to the investment alternatives (most of the time mutual funds) chosen by each participant in the plan. Each investment alternative has its own expense, which pays for the operation and management of the assets in that fund, and that expense is deducted from the earnings. These expenses can and will vary based upon how each participant chooses to invest their assets. Administrative expenses, as the name implies, cover the administrative activities of operating a retirement plan such as recordkeeping, technology, compliance, participant communication, etc. These expenses should not vary based upon a participants investment choices because the cost to administer the plan is the same regardless of how a participant chooses to invest their assets.
If a plan sponsor has never inquired about how the administrative expenses are paid there may be inequity in the expense paid by participants, meaning some participants may be paying a disproportionate share based upon their investment choices. Fee equalization or fee levelization is an approach to provide a more equitable sharing of administrative expenses and many times greater fee transparency as well. There are several fee levelization strategies that can be implemented based upon your plan’s current situation and recordkeeper. If you have never looked at the structure of your plan’s fees and expenses we recommend asking your recordkeeper or advisor about fee equalization.
While fairness and equality might not be the same, it’s important for plan sponsors to look at both when analyzing plan fees, so participants pay a fair price and share more equally in the cost of administering this important benefit.
Securities offered through Securities America, Inc. Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Nicklas Financial Companies, The Nicklas Agency, Inc., and Estate & Pension Services, Inc. are not affiliated with Securities America. Registered branch address is 3407 Knipp Dr, Jefferson City, MO 65109. (573) 893-5929.
Written by Brandon Nicklas
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