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What are reasonable fees for administering a 403b account, assets size is less than $5 million.

I'm Human Resources for a small healthcare system (~150 participants). We have a 403b, The TP Administrator and adviser are the same person (he has support staff). We trust him, but I wanted to double check on his fees:
The Annual Fee per Participant is $25. The Annual Flat Fee is $600. Rev. Sharing is .1% The Fee I'm wondering about is the 1% asset charge to the Participant. Is this fair and reasonable? Any input would be appreciate.

Jan 14, 2013 by byron from Blanding, UT in  |  Flag
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17 votes

I think more answers are needed to truly determine whether your plan's fees are reasonable or not. Is the 1% asset charge being paid to the advisor in total, or is that also paying the fees of the provider/recordkeeper? If the advisor is being paid the entire 1%, that would certainly be way above-average for a $4-5MM plan. If it also pays the provider fees, it may be resonable. Who gets the revenue-sharing? Does it go to the advisor or provider, or does it go back to the plan to help offset costs? What is the weighted-average expense of the funds in the plan? Are they proprietary funds of the provider (thus they make money from them) or is the provider unaffiliated with the investments offerred? What services are you receiving for the costs of the plan and the compensation paid to the advisor and provider?

At the end of the day, the DOL expects plan sponsors to have a process in place to determine that a plan's costs are reasonable for the services provided. So, even if you have all the fee info put together, no one can really say if it is fair and reasonable without looking at what you get for it. The best way to do this is to have a regular process in place where, say every 3-5 years, you get competitive bids from other advisors and providers (and document that you did it!). Some advisors make this a part of their ongoing service OR you could pay an outside advisor to do this on a fee-for-service basis. I wouldn't recommend doing this on your own as it is a complex process with many moving parts. Many plans now have this as a periodic, documented process to meet their fiduciary duty and ensure their participants are in good hands.

Remember that retirement plan fees are very much based on economies-of-scale. So, generally-speaking, the bigger it gets, the lower the expenses should be (as a % of the total assets). If your plan is almost $5MM now and it has the same fee structure when it was $1MM, there's a good chance it could be paying more that it should. Hope this helps!

2 Comments   |  Flag   |  Jan 14, 2013 from Virginia Beach, VA
byron

The "Investment Advisor" portion of his services is not receiving any compensation; the only compensation is being paid to his TPA.

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Flag |  Jan 14, 2013 near Blanding, UT
Craig M. Stanley, CPA QPFC

Hi Byron - I'm not really sure I am following your last comment. Who is actually receiving the 1%? Keep in mind that fees are paid in many different ways. In fact, a plan could have 0% participant charges (and many do!) and still have the same total plan cost as one that charges 1%. That's because fees are being charged in other areas that may not be as transparent. So, I would challenge anyone's blanket response that .50-1% is a good range without knowing all the facts. Good luck!

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Flag |  Jan 14, 2013 near Virginia Beach, VA

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13 votes

Understanding the fees charged to manage your retirement plan can be very complex. ERISA requires that the fees charged are "reasonable" for the services rendered. Based on the information you provided I would say that the administration fees are reasonable for your plan. The 1% seems high to me for advisory services on a plan under $5 million but you have to consider the services that you are receiving for that fee. From my experience a typical fee for comprehensive advisory serivces from a 403b specialist including 321 fiduciary status would be about 0.50%. My advice to you is to hire someone to perform a fee benchmark report specific to your plan. That will give you all the information you need to compare your plan to other similar plans and determine if the fees for your plan are reasonable.

1 Comment   |  Flag   |  Jan 14, 2013 from El Segundo, CA
byron

The "Investment Advisor" portion of his services is not receiving any compensation; the only compensation is being paid to his TPA.

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Flag |  Jan 14, 2013 near Blanding, UT

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9 votes
Eric Level 17

I agree with most of the people on this post, but I go back to the old saying, "Fees become an issue in the absence of value." If you love the advisor and he is there when you need service, then I'd say it's a non issue. If you think he is giving you lackluster service for what you and the participants are paying, then it is time to go to the market. 1% to a participant, who based on your plan numbers has an average account size of $33k is probably reasonable as long as he is doing something to help the participants. If he just setup the plan and shows up once a year, then go to the market to find someone with better service and possibly better fees.

I would also recommend looking at your competition. Use this website or another if you'd like, to find out what type of plan they are offering and the fees associated with them. Competitors are great resources to see where you stack up, including in the 403b space on fees.

Good Luck.

Comment   |  Flag   |  Jan 14, 2013 from Denver, CO

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7 votes

I've seen Participant Asset charges fluctuate between 0.5% and 1%, so this is within the range of acceptable. Could you find something cheaper? Probably yes, but that may be in exchange for a lower service level.

2 Comments   |  Flag   |  Jan 14, 2013 from Berwyn, PA
byron

As some background, initially we had an RFP where we provided an asset value of closer to 8 million; and he quoted us .5%. That seemed very reasonable. Then through audits we discovered our assets were less than 4 million, so he returned with a quote of 1%. The followup question is, should we have a provision that stipulates a gradually diminishing rate, to a lower limit of .5% should the plan increase over time? Or is that something we negotiate as time goes on and we renew with him?

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Flag |  Jan 14, 2013 near Blanding, UT
Erik Evans, CFP®

Let's set aside the audit and focus on what you have -- $4 million of money held in trust for people you care about. Look, that's a lot of money and in my experience, 1% is too high. I think you should be in the 0.5% to 0.75% range now, not gradually over time. There are lots of ways to negotiate that with your current advisor, but be prepared to walk away if he calls your bluff. Consider leaving him in place as your TPA, and shopping around for a new advisor will be an enlightening experience. If I were in your shoes, I'd be looking at independent advisors with strong investment backgrounds (instead of financial planning).

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Flag |  Jan 21, 2013 near Berwyn, PA

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7 votes
Alfred F Level 13

Byron

You should conduct a plan benchmark analysis each year to document your file if you are challenged on reasonable plan expenses

There are a number of consultants who will provide benchmarking services and it should be done by independent and objective organizations that do not create investment product in which the plan is currently utilizing.

Each organization has unique demographic as well as educational policy issues and therefore plan pricing can range from very low to very high

That is why the DOL uses a reasonable definition based on your industry, demographics, plan size and any other unique attribute that differentiates your organization from another

If you would like to learn more about plan benchmarking feel free to contact me.

Comment   |  Flag   |  Jan 14, 2013 from Wayne, PA

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6 votes

You should conduct a vendor RFP and allow the market place to determine if the fee is reasonable.

Comment   |  Flag   |  Jan 14, 2013 from Houston, TX

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5 votes

The one thing I'm picking up on here is you said "his TPA" several times: The "Investment Advisor" portion of his services is not receiving any compensation; the only compensation is being paid to his TPA.

If the TPA services cost 1%, you should look elsewhere!!

If there are multiple services being performed by the same individual, make sure you know what fees are attached to what services. (Is the TPA choosing the investments? Who's educating the participants and are they allowed to give education or advice? And so on.)

The DOL has a (rather arduous and long) fee breakdown schedule. www.dol.gov/ebsa/pdf/401kfefm.pdf I know it's for a 401k, but the reason we like it is because it will guide you to better understanding of all the services being provided to your plan, or at least get the conversation going. How else can you know if what you're paying is fair?

Ask your current providers to fill it out and, like the others have said, conduct an RFI and send to 3-5 companies which clearly states you're happy with your current provider but want to know more about the marketplace. There are also third party services that can benchmark your plan, but make sure to have someone with an understanding of the marketplace frame the results.

Comment   |  Flag   |  Feb 21, 2013 from Alexandria, VA

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4 votes

Byron - I believe the fees are excessive. There is a weak correlation, at best, between the level of fees and the level of service. The recommendation to issue an RFP is a sound one.

Comment   |  Flag   |  Feb 21, 2013 from San Francisco, CA

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3 votes

I think the comments by the others here are excellent and provide you with some good questions to ask of your provider. In the 401(k) world I would consider the 1% to be quite excessive for anything but the smallest of plans. I'm wondering if the 1% isn't going to fund some sort of annuity-based feature. I say this because this is not uncommon in the 403(b) world. I would also wonder about the details of the relationship between your advisor and the TPA. I don't say this to insinuate something negative, but if you don't fully understand all of the details here you should.

Comment   |  Flag   |  Jan 14, 2013 from Arlington Heights, IL

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2 votes
George Cones, JD Level 20

Byron,

The truth is the Defined Contribution plan fee structures have been unnecessarily complicated. Do you wonder why that is? Do you wonder why the DOL felt they had to do something to make them more transparent? At least under the new regulations, you can get the information on fees and potential conflicts of interest if you know what questions to ask. I am glad to see you asking them. The more complicated the fee arangement is, the more concern you should have.

To compare apples, you have to make sure you account for all of the expensese. If you deal with a registered investment advisor, who receives no commissions or third party payment you should have fewer "hidden" fees to deal with, besides having much less potential for conflicts of interest. You should be able to add up: the advisor's fee, the internal mutual fund or ETF fund manager expenses; then add the TPA fees, custody fee, legal expenses etc. and divide by the assets to come up with a percentage. Once you add up all of the expenses you have you "all in" expenses. Now you can compare apples.

To answer your question, for a fund your size you should be able to have a great range of mutual fund choices (we usually offer 25) which could include brand name index and actively managed institutional funds, and perhaps custom portfolios. It seems reasonable that you could have all of that for between 1% and 1.5% "all in."

There are a couple of great studies that were done by Deloitte for the Investment Company Institute, here is a link to the most recent study, http://www.ici.org/pdf/rpt_11_dc_401k_fee_study.pdf The "all-in" fees are sliced and diced any number of ways. This is very useful.

It may be useful to visit the DOL Pension website at: htttp://www.dol.gov/dol/topic/retirement/consumerinfpension.htm .

They have several documents that can help you understand the fees you pay, as well as what you should expect from the fiduciaries that manage your plan. Be sure your advisor contractually commits to being a fiduciary, preferably a 3(38) fiduciary but at least a 3(21) fiduciary. That acceptance of fiduciary duty will separate the wheat from the chaff (in Texas they have another way to express this concept).

Comment   |  Flag   |  Jan 15, 2013 from Wilmington, DE

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