Your questions on monitoring client and investment fees

For our last webinar in June, we addressed the topic "monitoring client and investment fees." Both during the webinar and in follow-up, we received a lot of questions asking for further clarification. In this post, you'll find answers to the majority of questions submitted during the session written by the panelists from the original webinar. 

A recording of the webinar can be viewed on the webinars page of our website. If you still have any questions, let us know in the comments below.

Our next webinar will be on Thursday, September 9 from 4:00-5:00 p.m. EDT on the topic of how regulatory reform will change the way advisors and brokers do business. To register, click here.

Now on to those questions:

Q: For the mutual fund companies, the management fee is normally included in the expense ratio, correct?
A: Yes, the management fee is included in the expense ratio.  We typically use the Prospectus Net Expense Ratio in our analysis and it includes the management fee, 12b-1 fee, administrative fee, and all other asset-based costs incurred by the fund.

Q: Where do you get the information for the sub t/a fees? We have found that different custodians negotiate different sub t/a fees from fund families.
A: The sub t/a fees used in the presentation were examples.  You are correct in stating that the sub t/a fees can change from custodian to custodian and from plan to plan.

Q: For an individual with a 403b annuity plan, it sounds like all annuity fees are included in the published "expense ratio," correct?
A: When evaluating an annuity expense ratio we look at the expense ratio for the underlying investment and the M&E risk charge for the annuity component.  There are other fees and expenses that are not part of this "expense ratio" that should be considered such as contract charges, annuity administration fees and surrender fees.  These components are not part of the expense ratio.

Q: What resources do you recommend (books, websites, etc.) to determine what are reasonable plan fee's, industry avg's  etc.
A: Fiduciary Benchmarks, Brightscope, icifactbook.com, and 401k Averages Book

Q: Please clarify how the ERISA bucket works, why created, etc.

A: The ERISA bucket/budget/account is essentially the "checking account" for the plan. 12b-1 and other revenue sharing components fill the bucket and are then used to pay for plan services, such as recordkeeping, administration, advisory services, etc.  The account can only be used to pay for services that benefit the plan participants. If more revenue is coming in than going out to pay for plan services, then the revenue sharing should be revisited and the extra money should be paid out to plan participants. 

Q: Comment- PLANSPONSOR Pathfinder is a service to obtain plan specific pricing. Fiduciary Benchmarks and BrightScope are great tools to begin the conversation about where a plan's fees fall in a general group but we feel that it's critical to go to the market to obtain plan specific pricing in order to answer the question "Are my fees reasonable..."  Two plans of identical assets may have varying fee structures and both can be reasonable, depending on the services provided. Pathfinder streamlines that process. I am happy to discuss further offline.
A: We’re not familiar with Pathfinder, but it sounds like it compares platforms directly on a one-to-one basis.  This may be an appropriate way to evaluate plan expenses in an RFP scenario, but I think it's also critical to evaluate plans amongst their peers on a periodic basis. This is what Fiduciary Benchmarks and BrightScope provide.

Q: How are others addressing broker fees transacting in stock?
A: Broker fees can be evaluated on two levels: 1. Monitoring and evaluating client brokerage fees is an important review that a fiduciary advisor should undertake. 2. Evaluating the transaction costs and activity of the investment manager is another important consideration.  Reviewing the turnover ratio is a simple way to begin monitoring this process.

Q: Is there a resource that can help us determine what the Stable value fees are?
A: The actual fee charged to a stable value investment owner should be disclosed like any other expense ratio.  Using benchmarking tools would then be an appropriate way to compare the data to the plans stable value option.

Q: Are custom holdings now integrated into the fi360 Toolkits? 
A: Yes, they are integrated.

Q: What types of investment fees do you suggest monitoring/reporting to a retirement plan sponsor?
A: All of them!  The recently released 408(b)(2) “interim final regulation” specifies that all qualified pension plan service providers receiving more than $1,000 in direct or indirect compensation must disclose their compensation in writing to the plan sponsor.  This would generally include fiduciary services, recordkeeping or brokerage services, and just about anyone who is being compensated indirectly.

Q: Do we know what validates "benchmarking" as evidencing what is reasonable and fair, given the lack of competition between fund managers?
A: The Practices require investment fiduciaries to monitor the service providers they hire to assist them and benchmarking is necessary in order to do this properly.  . Benchmarking manager performance against an index and a group of peers is the minimum evaluation we recommend.  The larger the number of peers that form the basis of comparison, the more comfortable one can feel about the validity of the results.  As for lack of competition among funds, I don't know if there is a "lack" of competition.  For the second quarter of 2010, there were over 24,000 funds in our fund and ETF database.

Q: How do we detect internal transfer fees if investment provider is also TPA?
A: For qualified pension plans, the recently released  408(b)(2) “interim final regulation”will require service providers to disclose all compensation - both direct and indirect.  For other clients types, ask them to disclose all compensation as well.  If they are unwilling to do so, look for another service provider

Q: How did you arrive at brokerage costs averaging 40Bps/year?  I would like to be able to show clients how much their brokers really cost them, using a statistic like this. 
A:  Those estimates are based on our experience.  http://www.vanguard.com/bogle_site/sp20050524.htm is another source of similar data.

Q: What are the current practices & trends in fees either as flat fees or % of assets?
A: Our sense is that the trend is clearly towards flat fees or % or assets and away from commissions.

Q: Did the Jones case involve Fidelity?
A: No, the Oakmark family of mutual funds was involved.

Q: In the bill just passed, it is "service providers" that must provide disclosure.  Mutual funds don't sign a service agreement.  Are they exempt from disclosure?
A: In the recently released 408(b)(2) “interim final regulation, mutual funds are not one of the “covered services” that will be required to meet the disclosure requirements.  The requirements become effective July 16, 2011.

Q: What is your position on revenue reimbursement back to 401k plans and 401k participants?
A: When there is an excess of revenue received over fees that need to be paid, we believe reimbursement back to the plan participants is appropriate.

Q: How specific can my advice be to plan participants?
A: Generally, when advice to participants includes an analysis is their personal financial situation, an advisor has assumed a fiduciary role.  Even if your service agreement states otherwise, it would be difficult to argue in this case that you are not a functional fiduciary.

Comments

[Chris Tobe]

You really do not address stable value. With separate account and general account insurance versions of stable value the spread can be as much as 200 basis points

[Carl S]

401k Investment Help!

I am new to investing and my company has signed us up for a 401k plan to start next month. You can take a test to get a target portfolio and have things picked for you but I have no idea what I'm looking at. Can Anyone help tell me if these are good investments??

1) SSgA Government Market Fund
2) SSgA U.S. Bond Index Fund
3) T Rowe Price Retirement 2050 Fund - Class R
4) SSgA S&P 500 Index Fund
5) SSgA S&P MidCap Index Fund
6) BlackRock Small Cap Growth Equity Portfolio - Investor A Class
7) SSgA International Index Fund

I have no clue what to do. Should I pick new investments? Hold on to them? Any advice would be great

[James Morgan - Puritan Financial Advisor]

A recording of the webinar can be viewed on the webinars page of our website.