Assessing Fee Fairness: Characteristics of an Effective Plan Fee Structure
Because a plan’s administrative costs are ultimately paid by participants, plan sponsors are obligated to allocate administrative fees in a fair and appropriate manner.
Regulatory and fiduciary concerns have led many plan sponsors to spread administrative services across several providers and to adopt open architecture investment menus with dozens of fund managers. While these approaches help distribute fiduciary risks, they make it harder for plan sponsors to levy fees that are reasonable and applied fairly, which can result in cost allocations that are neither efficient for the plan sponsor nor equitable for participants. To address these concerns, this paper offers four criteria for evaluating fee structures and examines the extent to which two common approaches satisfy desired conditions.
To determine how well different fee structures meet fairness conditions, the authors analyzed administrative data from a plan with more than $500 million in assets and over 4,700 participants in 2015. At the time of the study, the average plan balance was approximately $107,000, and plan costs were estimated to be $0.4 million.