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The Future Method of Expense Collection: Levelized
Frequently an additional administrative expense to cover plan costs is added to the participant’s total fees from the investment. These fees are often charged in the form of revenue sharing built into the expense ratio of many retirement plan mutual funds. As plan sponsors receive more details about the source of particular fees--especially administrative ones--they have begun to ask questions about attaining more equitable distribution of fees among their participants’ accounts. Revenue Sharing Revenue sharing is a method of plan expense collection in which a mutual fund company charges a fee, and then refunds a portion to the plan’s recordkeeper to cover administrative expenses. These expenses are incurred by the recordkeeper for providing administrative services such as maintaining participant account records, providing quarterly statements, fielding participant inquiries through a call center, and maintaining website for participant and plan sponsor usage, etc. Building service fees into investment options and paying them through revenue sharing amounts available in the funds covered the fees “behind the scenes.” This method has worked well. Plan administration is expensive, and sponsors appreciate a mechanism that allows users to pay for services of which they are the primary beneficiaries and users. Given participants’ reactions to even nominal fees listed on their quarterly statements, incorporating administrative fees into the investment expense made internal administration and communication much simpler. However, the revenue sharing system has drawbacks. Not all mutual funds charge/pay the same level of revenue sharing. Some of the funds have no revenue sharing, whereas others may have as much as 0.50% or more. Participants who invest in a mutual fund which charges a higher revenue sharing fee ultimately pay more of administrative costs for the plan, and unknowingly support their co-workers’ plan costs. Levelized Fees Because of this imbalance, plan sponsors have been seeking a way to allow for more equitable sharing of plan expenses. Recordkeepers can administer programs whereby each investment option has the same revenue sharing percentage amount, which allows all participants to bear a proportionate share of the administrative costs, regardless of funds used or revenue provided.
Frequently an additional administrative expense to cover plan costs is added to the participant’s total fees from the investment. These fees are often charged in the form of revenue sharing built into the expense ratio of many retirement plan mutual funds. As plan sponsors receive more details about the source of particular fees--especially administrative ones--they have begun to ask questions about attaining more equitable distribution of fees among their participants’ accounts.
Revenue Sharing
Revenue sharing is a method of plan expense collection in which a mutual fund company charges a fee, and then refunds a portion to the plan’s recordkeeper to cover administrative expenses. These expenses are incurred by the recordkeeper for providing administrative services such as maintaining participant account records, providing quarterly statements, fielding participant inquiries through a call center, and maintaining website for participant and plan sponsor usage, etc.
Building service fees into investment options and paying them through revenue sharing amounts available in the funds covered the fees “behind the scenes.” This method has worked well. Plan administration is expensive, and sponsors appreciate a mechanism that allows users to pay for services of which they are the primary beneficiaries and users. Given participants’ reactions to even nominal fees listed on their quarterly statements, incorporating administrative fees into the investment expense made internal administration and communication much simpler.
However, the revenue sharing system has drawbacks. Not all mutual funds charge/pay the same level of revenue sharing. Some of the funds have no revenue sharing, whereas others may have as much as 0.50% or more. Participants who invest in a mutual fund which charges a higher revenue sharing fee ultimately pay more of administrative costs for the plan, and unknowingly support their co-workers’ plan costs.
Levelized Fees
Because of this imbalance, plan sponsors have been seeking a way to allow for more equitable sharing of plan expenses. Recordkeepers can administer programs whereby each investment option has the same revenue sharing percentage amount, which allows all participants to bear a proportionate share of the administrative costs, regardless of funds used or revenue provided.