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Use Total Cost Analysis to Help Win Business   

 

In 2012, the U.S. Department of Labor adopted new fee disclosure regulations to help employers and plan participants understand the fees they are paying. These regulations were promulgated by consumer and industry concern surrounding both the complexity and amount of retirement plan fees charged by service providers.

Fee Disclosure Regulations

Much of the complexity surrounding fees has been created because of revenue sharing arrangements that were struck over the last 20 years between mutual funds, investment managers, and retirement platforms and providers. These arrangements include sub-transfer agency fees, 12b-1 fees, and other types of revenue sharing that is often passed between investment managers and other service providers to pay for their services making it hard to understand the true cost of fees.

The new rules require most retirement plan service providers to issue fee disclosure statements to their retirement plan clients (referred to as Section 408(b)(2) Fee Disclosure) that plainly disclose all fees paid by the plan, including how revenue sharing is treated.

More Help Is Needed

While fee disclosure regulations were a step in the right direction toward demystifying plan fees, employers need help now more than ever in understanding the fees they are paying for plan services. This is because the regulations brought to light a renewed regulatory focus on the importance of employers’ fiduciary responsibility of making sure fees are reasonable in light of the services offered and because of the impact that excess fees have on a participant’s retirement readiness. We have found that even though employers generally receive fee disclosure reports from their service providers, they often lack the time and knowledge to evaluate them and compare total fees to other options in the marketplace.

Total Cost Analysis

Helping employers perform a Total Cost Analysis for their retirement plan is a great service that an advisor can provide, and it can help advisors win new business. We have found that many employers have never evaluated their retirement plan fees even though plan assets have grown, available service options have expanded, and new, lower-cost investment structures such as ETFs and Index Funds have become much more common to retirement plans (even small, closely-held plans) over the past few years.

JULY can assist advisors in preparing a Total Cost Analysis for existing and prospective clients. Our Total Cost Analysis Reports include a comparison of a plan’s existing fee structure to other available options as well as industry benchmarks. We have found that performing a Total Cost Analysis combined with a true open architecture approach to building a plan’s services and investments can be an extremely effective method at bringing to light the opportunity for improvement. With an open architecture platform, advisors and plan sponsors have a great deal of freedom to create the ideal retirement plan and compete against older platforms that lack recent advances in the retirement marketplace. Some of the benefits of open architecture include:

Ability to improve the plan’s investment options by having freedom to choose high-quality, low-cost investments from thousands of investment options

No requirement to use proprietary funds as with many platforms

Ability to lower costs and reduce complexity by eliminating revenue sharing and wrap fees

Ability to improve their own compensation structure by choosing either an asset-based or commission-based fee structure

Having the freedom to act as an investment fiduciary over plan assets or to use the services of an outside fiduciary

Taking advantage of non-asset-based pricing for recordkeeping and third party administration services (a best practice in fee transparency)

Advisors that take advantage of our Total Cost Analysis services receive a report that can be presented to a prospective employer breaking down the cost of the plan’s existing fees and comparing that to other options, including a projection of fees over time.

Example Total Cost Analysis Report

The example below shows some of the information included in JULY’s Total Cost Analysis Reports.

SERVICE

PROPOSED

CURRENT

BENCHMARK

$ Amount

% Assets

$ Amount

% Assets

Open Architecture Recordkeeping

$3,300

.165%

$0

.00%

 

Third Party Administration

$1,500

.075%

$3,000

.15%

 

Custodial / Trustee Services

$1,000

.050%

$0

.00%

 

Investment Contract / Wrap Fee

$0

.000%

$4,200

.21%

 

Investment Advisor Services

$10,000

.500%

$10,000

.50%

 

3(38) or 3(21) Fiduciary Services

$1,600

.080%

$0

.00%

 

Gross Investment Management Expense

$3,600

.180%

$15,800

.79%

 

Revenue Sharing Credits

$0

.000%

$0

.00%

 

TOTAL FIRST YEAR COST

$21,000

1.05%

$33,000

1.65%

1.46%

ESTIMATED CUMULATIVE COST

3 Years

$75,000

 

$120,000

 

 

5 Years

$146,000

 

$237,000

 

 

Assumptions
This example shows an existing retirement plan with $2 million in assets, $350,000 in net additions, and 40 participants.  The current plan is with large, brand-name national provider and the proposed solution is using open architecture with an ETF-lineup managed through a 3(38) investment fiduciary.  The above estimate represents a projection of fees using a 6% annual return and monthly deposits into the plan.  Actual results will vary based on actual returns and transactions. 

The benchmark was calculated from a sample of 734 plans with average assets between $1.5 million and $2.0 million in plan assets and 25 to 50 participants.

How to Get Started

JULY’s Regional Sales Consultants are trained to assist advisors and employers in preparing Total Cost Analysis Reports. To prepare a Total Cost Analysis, advisors first gather copies of the current Fee Disclosure Reports for a prospective plan for each of the plan’s current service providers. Our Regional Sales Consultant will assist in analyzing the fee disclosures and preparing the report. JULY’s Regional Sales Consultants can also assist advisors in preparing a proposal and gathering the information needed on options for a proposed plan to show in the comparison of total cost.

If you have an interest in learning more, contact your Regional Sales Consultant today.