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Understanding Retirement Plan Fees – 1 Hr CE

Understanding Retirement Plan Fees – 1 Hr CE. When you purchased your last car, what factors did you consider?. Tell me about fees. “ ERISA requires employee benefit plan fiduciaries to act solely in the interests of, and for the exclusive benefit of, plan participants and beneficiaries…” 1

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Understanding Retirement Plan Fees – 1 Hr CE

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  1. Understanding Retirement Plan Fees – 1 Hr CE PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  2. When you purchased your last car, what factors did you consider? PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  3. Tell me about fees “ERISA requires employee benefit plan fiduciaries to act solely in the interests of, and for the exclusive benefit of, plan participants and beneficiaries…”1 1 www.dol.gov/ebsa/fiduciaryeducation.html (Fee disclosure worksheet) PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  4. Tell me about fees “The service provider offering the lowest cost services is not necessarily the best choice for your plan.” 1 1 www.dol.gov/ebsa/fiduciaryeducation.html (Fee disclosure worksheet) PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  5. Four basic fee types • Asset-based fees • Per-participant fees • Transaction-based fees • Flat rate fees PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  6. Four basic fee categories • Investment product fees • Plan administration expenses • Plan start-up or conversion related expenses • Service provider termination related charges PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  7. Investment product fees • Collective investment funds (CIFs) • Insurance/Annuity products • Mutual funds • Individually managed accounts • Brokerage window • Other product fees PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  8. Investment product fees Collective Investment Funds (CIFs) A tax-exempt pooled fund operated by a bank or trust company that commingles the assets of trust accounts for which the bank or trust company provides fiduciary services. PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  9. Investment product fees Cost of CIFs CIF management fee 1.00% Asset management charge 0.75% Total cost of CIF 1.75% PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  10. Investment product fees Insurance / Annuity Products Retail mutual fund OR insurance company fund managed in similar fashion to specific retail fund 1.15% Insurance Co. Fund Mgt. Fee 0.25% Retail mutual fund 1.00% Asset investment cost = 1.25% PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  11. Investment product fees Insurance/Annuity Product Separate Account (SA) Insurance product 1.25% Asset management charge 0.75% Total cost of SA 2.00% PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  12. Investment product fees Mutual Funds A key to cost in programs that offer mutual funds is the share class of fund in which they invest. PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  13. Which program is cheaper? Wrap ProductNAV Product Retail fund 1.00% Retail fund 1.80% Wrap fee 0.75%Wrap fee 0.00% Total cost 1.75% Total cost 1.80% PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  14. Which program is cheaper? Wrap Product (Year 2) NAV Product Retail fund 1.00% Retail fund 1.80% Wrap fee 0.70%Wrap fee 0.00% Total cost 1.70% Total cost 1.80% This can become even more dramatic if the wrap product has built-in price reductions as assets grow. PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  15. Wrap fees – common types Tiered Rate All assets held at the same rate; when breakpoints are reached, the wrap fee on all assets decline. PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  16. Wrap fees – common types Tiered Rate — Example $750,000 – $999,999 = 0.80% $1,000,000 – $1,249,999 = 0.75% Example Year one, plan has $800,000 = wrap fee is 0.80% Year two, plan has $1,100,000 = wrap fee is 0.75% PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  17. Wrap fees – common types Blended Rate Similar to tax brackets, rate breaks are incremental — the cost on the first dollar never goes down. PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  18. Wrap fees – common types Blended Rate — Example $0 - $249,999 = 1.40% $250,000 - $749,999 = 1.00% $750,000 - $999,999 = 0.70% $1,000,000 - $1,249,999 = 0.60% Blended rate at $1,000,000 = 1.03% PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  19. If all things are equal… … are all things equal? What about … opportunity costs? PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  20. If all things are equal… …are all things equal? Things to check for: • Proprietary fund requirements • Investment category dominated by proprietary funds • Additional costs for outside funds PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  21. If all things are equal… The Department of Labor fee sheet breaks the soft dollar costs down into hard dollar costs, thus looking at the effect of cost of specific funds, not averages. What does that mean? PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  22. What is the average fund expense in this contract? Fund # Fund Exp. 1-year 3-year 5-year 1 0.60% -9.03% 1.43% 3.86% 2 1.20% -6.68% 0.43% 4.86% 3 0.90% 16.03% 12.43% 9.86% 4 1.70% 10.23% 15.68% 13.55% (1.10%) = (0.6 +0.9 +1.2 +1.7) ÷ 4 (1.30%) = (0.9 + 1.7) ÷ 2 These examples contain fictional information for the purpose of illustrating how average fund operating expenses are calculated PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  23. Be careful with averages $100,000 in large-cap growth fund at 0.70% = $ 700 $100,000 in small-cap value fund at 0.70% = $ 700 $100,000 in International fund at 1.40% = $1,400 $600,000 in lifestyle fund at 1.20% = $7,200 Average fund cost = 4.00% ÷ 4 = 1.00% Weighted average fund cost = $10,000 ÷ $900,000 = 1.11% PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  24. Revenue sharing A mutual fund being used in an annuity product or wrap product has an operating expense of 1.25%, of which 0.25% is a 12(b)1 fee. What happens to that 12(b)1 fee? PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  25. Revenue sharing Often the 12(b)1 fee is paid to the insurance company or wrap provider. This will help offset what the provider would normally charge to provide the omnibus trading. In other programs, it may be paid to the producer or back to the participant (which may lead to higher record-keeping or administration fees). PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  26. Hard dollar vs. soft dollar The majority of what we have discussed are “soft dollar” costs: • Borne directly by the plan participant • Do not show as line item expenses in most programs • Plan participants merely see a net performance PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  27. Hard dollar vs. soft dollar What many plan sponsors are looking at are “hard dollar” expenses: • Those that show as a line item expense • Often only those fees they pay as a corporation • Many vendors have a way to convert hard dollar expenses to soft dollar expenses PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  28. Putting it all together Plan A Administration and record-keeping $ 5,000 Mutual fund charges $10,000 Annuity or wrap fee ($900,000 at 1%) $ 9,000 Total cost $24,000 PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  29. Putting it all together Plan B Administration and record-keeping $ 2,500 Mutual fund charges $16,000 Annuity or wrap fee ($900,000 at 0.80%) $ 7,200 Total cost $25,700 At first look, Plan B looks better in two critical elements. PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  30. Other hard dollar items • Does the administration fee include a signature-ready Form 5500? • Does the fee include all testing (ADP, ACP, eligibility, top-heavy?) • What about re-testing or failure correction? • Per eligible or per participating? PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  31. Per eligible or participating Let’s say a plan sponsor has a plan with: • 100 employees eligible to make deferrals • Only 70 employees are participating PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  32. Per eligible or participating Vendor A $25 per eligible (may even be quoted as $25 per “participant,” because if you are eligible you are considered a participant, even if you have $0 balance) 100 x $25 = $2,500 Vendor B $30 per participant(w/account balance) $ 0 per eligible(w/ no balance) 70 x $30 = $2,100 PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  33. Recap • Fees and charges can be quoted many different ways • You need to be sure you are comparing “apples to apples” not “apples to bicycles” PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

  34. Questions Call us at 1-800-626-3112. Thanks for coming! PNM-0176AO.7 FOR BROKER/DEALER USE ONLY—NOT FOR USE WITH THE PUBLIC

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