Unlock the Secrets of Investment Vehicles and Fees for Plan Sponsors!

In the world of retirement planning, constructing an investment menu for a defined contribution retirement plan is crucial. While the focus is often on selecting the right investments, including managers and products, the choice of investment vehicles is equally important. By choosing the most suitable mutual fund share class or collective investment trust (CIT) tier, the retirement plan committee can align the organization’s investment philosophy effectively.

Key Terminology:

1. Employee Retirement Income Security Act (ERISA): This act mandates that retirement plan fiduciaries act prudently and in the best interest of the plan’s participants and beneficiaries.
2. Department of Labor’s (DOL) Fee Guidance: This guidance emphasizes the responsibility of plan sponsors to monitor plan expenses and assess the reasonableness of total compensation paid to service providers.
3. Revenue Sharing: Arrangement where service providers receive indirect compensation from investment managers.

The Current Landscape:

Given ERISA requirements, the DOL’s fee guidance urges plan sponsors to analyze fee arrangements diligently. With the complexity of revenue sharing and opaque fee structures leading to potential litigation, many organizations are transitioning towards zero-revenue share classes for greater transparency and cost savings.

Share Class Choice Impacts Fees and Investment Performance:

1. The disparity between revenue-sharing and zero-revenue share classes can significantly impact fees and investment performance.
2. Higher fees can diminish investment growth over time, reinforcing the importance of selecting the appropriate vehicle to optimize participant outcomes.

Analyzing Fee Arrangements:

1. Revenue Sharing: Calculate total compensation paid to service providers and benchmark it against industry standards.
2. Revenue Rebate: Utilize a cap on plan fees and rebate excess revenue to participants.
3. Revenue Offset: Offer discounts on recordkeeping fees based on plan sponsor investment selections.
4. Zero Revenue: Opt for classes that do not pay service fees, ensuring transparent fee structures and improved investment returns.

Free Equity Among Participants:

Ensuring fee equity among participants is imperative to avoid disadvantaging certain individuals due to their investment choices. By offering transparent fee structures through zero-revenue share classes, plan sponsors can enhance participant outcomes and fulfill their fiduciary responsibilities effectively.

Conclusion: Consider transitioning to zero-revenue share classes to enhance transparency, reduce costs, and optimize participant outcomes. By making informed choices regarding investment vehicles, plan sponsors can navigate the intricate landscape of defined contribution retirement plans successfully.