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Direct and Indirect Retirement Plan Fees Matter

Direct and Indirect Retirement Plan Fees Matter

June 10, 2024

The distinction is critical for employers managing retirement plans

For employers tasked with overseeing retirement plans, navigating the intricacies of fees is essential to work toward the financial well-being of plan participants and fulfill fiduciary responsibilities. Among the various fee structures associated with retirement plans, distinguishing between direct and indirect fees is crucial for transparency and cost efficiency.

Furthermore, employers should be aware that they have the option to request direct fees only, a strategy that can promote fee transparency and mitigate potential conflicts of interest.

Direct vs. Indirect Fees

Direct fees are charges explicitly disclosed and paid directly from the retirement plan assets. These fees typically include investment management fees, administrative expenses, recordkeeping costs, and advisory fees. Direct fees are transparent and readily identifiable on fee disclosures and statements provided to plan participants.

In contrast, indirect fees encompass expenses incurred by investment funds or service providers that are not explicitly deducted from plan assets but are instead embedded within investment options. Examples of indirect fees include revenue sharing arrangements, 12b-1 fees, and sub-transfer agency fees. Indirect fees may not be as transparent as direct fees, making it challenging for employers and plan participants to fully understand the total cost of investment options.

Importance of Fee Awareness

Employers have a fiduciary duty to prudently manage retirement plan assets and act in the best interests of plan participants. Understanding the distinction between direct and indirect fees is crucial for assessing the reasonableness and competitiveness of fee arrangements and ensuring transparency in fee disclosure.

Direct fees provide employers and plan participants with clarity regarding the specific costs associated with plan administration and investment management. By proactively monitoring and benchmarking direct fees, employers can evaluate the value proposition offered by service providers and make informed decisions to optimize plan performance while managing costs.

Indirect fees, on the other hand, may introduce complexities and potential conflicts of interest. Revenue sharing arrangements and embedded fees within investment options can obscure the true cost of investment products and create incentives for service providers to prioritize certain funds over others. Employers must exercise due diligence in scrutinizing indirect fees and assessing their impact on plan participants' overall investment returns.

Requesting Direct Fees Only

Employers have the option to request direct fees only from service providers, a strategy aimed at enhancing fee transparency and aligning with fiduciary best practices. By opting for direct fees only, employers can ensure that all costs associated with plan administration and investment management are explicitly disclosed and paid directly from plan assets.

Requesting direct fees only enables employers to negotiate fee arrangements based on a clear understanding of the services provided and the associated costs. This approach promotes fee transparency, mitigates the risk of hidden costs, and fosters a fiduciary culture focused on accountability and participant advocacy.

Fiduciary Obligations Matter

The distinction between direct and indirect fees is paramount for employers managing retirement plans and fulfilling fiduciary obligations. By prioritizing fee transparency and awareness, employers can promote the financial well-being of plan participants, work toward optimizing plan performance, and mitigate potential conflicts of interest.

Requesting direct fees only from service providers empowers employers to exercise greater control over fee structures and uphold fiduciary standards of prudence and transparency in retirement plan management.

 


Important Disclosures

This information was developed as a general guide to educate employers and plan sponsors but is not intended as authoritative guidance or tax or legal advice.  Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. 

This article was prepared by FMeX.

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