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Experts in Personalized Retirement Plan Design & Administration

401k Fee Allocation Models

While the U.S. Department of Labor (DOL) requires plan fiduciaries to closely monitor fees and ensure that they are competitive and reasonable, it has not specified a method by which fees must be allocated among participants. There are a number of options available to allocate plan expenses among participants. This article explores the three most popular models. Source: Shrm.org

3 Participant Fee Allocation Models:

Expense Reimbursement Account (ERA)- 

“In this model, also known as a revenue credit account, the recordkeeper charges a flat rate for its services (typically expressed as a percentage of plan assets, e.g., 0.20%). Revenue sharing amounts in the plan investments are then applied to these fees.

If the total revenue sharing is insufficient to meet the cost, the recordkeeper charges an additional fee to cover the shortfall. The organization may elect to pay this amount directly or to pass it on to participants.

If the total revenue sharing exceeds the required revenue, the excess amount is allocated to the plan’s ERA. The organization can then use this excess revenue sharing to pay for legitimate plan fees, such as auditors, legal counsel, advisors, communication initiatives and other plan expenses, or return the excess amount back to participants.”

Fee Levelization-

“In this model, the recordkeeper applies the required revenue to each individual investment option. If the investment has exactly the required revenue amount (0.20% in our example) in revenue sharing built into its expense ratio, then the fees match. If revenue sharing in the fund exceeds required revenue (e.g., 0.25%), the recordkeeper credits each participant who has assets in the fund with the amount of the excess (in our example, 0.25% – 0.20% = 0.05% credit returned to participants). If the investment provides less than the required revenue amount, the recordkeeper adds a “wrap” fee in the amount of the shortfall to the accounts of each participant using the investment.”

Flat Dollar Payment-

“A third method for covering recordkeeping fees is to charge a flat dollar amount to each participant. The recordkeeper charges a fee and deducts the stated amount from each account either annually or quarterly, and the participants see this amount on their statements.”

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401k Fee Allocation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401k Fee Allocation

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