By Jeff Chang
Many public agencies’ 457(b) plans, where all fees are paid by the plans, may be neglected for years or even decades. And while this neglect may not cost the district or the city any more money, it is definitely costing plan participants.
Recently, we advised a number of public agencies that for one reason or another had not reviewed their 457(b) plan fees and expenses for quite a number of years. Here’s what we found:
- Recordkeeping and investment advice fees often are structured to yield a targeted amount of revenue – an amount that may be grossly inappropriate if the plan’s assets increase dramatically. Unsophisticated plan sponsors often permit recordkeepers to express their fees as a percentage of plan assets. For example, take a small special district’s 457(b) plan with 20 participants and $1,000,000 in total assets. While it might be reasonable for a recordkeeper to initially charge something like 50 basis points for its annual recordkeeping services (the equivalent of $250 per participant), it would be inappropriate and unreasonable for the recordkeeper to continue to receive 50 basis points ten years later when the plan’s assets have increased to $3,000,000. The plan still only has 20 participants. However, due to plan contributions and investment earnings, the average balance is now $150,000 (not $50,000). If you recognize that the recordkeeper’s job is largely an accounting function, the fee for keeping track of participants’ accounts should remain the same no matter how large the account grows. In this case, plan participants are paying approximately three times too much for the recordkeeping services they are receiving.
- A large number of public agencies maintain multiple 457(b) plans. Usually, this situation has evolved to accommodate employee calls for more investment choices. Apart from the likely compliance problems associated with multiple uncoordinated plans, the plan participants often lose out because the fees they are paying are based on three smaller pools of assets rather than on one larger pool of assets. In one recent case involving three 457(b) plans with total assets of $10,000,000, the participants were paying “retail” costs for their mutual fund choices when they could have been “wholesale” through the use of institutional class funds. A single larger plan has more purchasing power.
- Excess fees and expenses matter. According to the SEC, a participant investing $100,000 over a 20 year period and earning a 4% annual return will end up with $30,000 less if his/her fees are just 75 basis points higher than what might be considered normal (.25%).
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.