The opinions expressed in this presentation are those of the speaker. The International Societydisclaims responsibility for views expressed and statements made by the program speakers.
401(k) Plan Fee Analysis: Fiduciary Oversight
Jim ModelskiPrincipalDiMeo Schneider & AssociatesChicago, Illinois
16B-1
2
DiMeo Schneider & Associates, L.L.C.
James Modelski, CFS, Principal, Director of Communication & Education• 16 years industry experience; 14 years with DiMeo Schneider• Advises institutional clients on a variety of topics, including asset allocation, investment
manager relations and portfolio rebalances • Member of DiMeo Schneider & Associates, L.L.C.’s Investment Committee• Columbia College, BA: Loyola University, MBA• Member of Investment Analysts Society of Chicago; The CFA Institute; The Chicago Council
on Foreign Relations and The Union League Club
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Plan Fee Overview
16B-3
Regulatory Perspective
ERISA requires fiduciaries to carry out their
responsibilities prudently and solely in the interest of
the plan’s participants and beneficiaries. Among other
duties, fiduciaries have a responsibility to ensure that
the services provided to their plan are necessary and
that the cost of those services is reasonable.
Source: EBSA Publications
16B-4
Service Provider Disclosure: What Should Fiduciaries Do?
• Plan fiduciaries for covered plans have an affirmative duty to make sure they receive the prescribed disclosures from all covered service providers.—408(b)(2)– If the disclosure requirements are not met, a prohibited transaction may
occur
• Ensure that service providers make the required disclosures—404(a)(5)– Identify all covered service providers
– Review existing and pending contracts
– Resolve uncertain disclosure items
16B-5
Tussey v. ABB, Inc. (March 31, 2012)
“…Plan sponsor breached its fiduciary duty because it did not monitor recordkeeping costs and failed to comply with the Plan’s Investment Policy Statement.”
This case deals with a multitude of important issues. It appears the key matter is this plan sponsor’s failure to follow the policies outlined in the Investment Policy Statement.
The court specifically states that a plan may choose revenue sharing as its model for compensating its recordkeeper and, perhaps more importantly, recognized that the use revenue sharing arrangements is not per se imprudent.*
The court did not find that there was a duty to disclose revenue sharing to participants.*
The court ruled that ERISA fiduciaries are not required to make the “best choice”, just a prudent choice.*
Regulatory and Legislative Update
*Source: “401(k) Fee Litigation Update -What Tussey v. ABB Mean s for Plan Sponsors” – Carrie Byrnes & Steve Schaffer
16B-6
Plan Fees
Investment FeesRelated to the management of investment options
• Investment management fees
• Distribution and/or service (12b-1) fees
• Transfer agent, custody, accounting, legal fees
• Sales charges (typically waived for 401(k) plans)
• Insurance based products may have surrender and transfer charges
Administration FeesDay-to-day operation of plan
• Plan recordkeeping• Legal and trust services• Telephone
representatives/voice response system
• Internet (account information and conduct transactions)
• Communication/education services
Individual Service FeesRelated to optional “elected” services
• Loans• Distributions/Withdrawals• Self-directed brokerage• Managed account fees
Other FeesOther miscellaneous fees
• Legal• Audit• Advisory/Consulting
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1. Source: Inside the Structure of Defined Contribution/401(k) Plan Fees: A Study Assessing the Mechanics of the ‘All-In’ Fee, November 2011, Deloitte Consulting LLP; Investment Company Institute. Data presented on a participant-weighted basis.
‘All-In’ Plan Fee
0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%1.60%1.80%
$1-$10M $10-$100M $100-$500M $500M-$1B >$1B
'All-In' Fee Range by Plan Size (10th and 90th Percentile)1
1.60%
1.23%1.05%
0.56%0.80% 0.62%
0.45%
0.13%
0.46%
0.58%
0.00%
0.50%
1.00%
1.50%
2.00%
100-500 500-999 1,000-4,999 5,000-9,999 10,000+
'All-In' Fee Range by Plan Participant Size (10th and 90th Percentile)1
1.60%1.44
1.17%0.92% 1.03%
0.80% 0.70% 0.54% 0.42%
0.21%
• ‘All-In’ fee incorporates administration, recordkeeping, communication, investment management and investment consulting/financial advice.
• 6% of survey respondents reported external investment consulting/advice fees.
• Investment expenses account for approximately 75% of these fees. Note: the level of these fees is dependent upon both participant-directed investment decisions and plan sponsor investment decisions.
The ‘All-In’ Plan Fee Benchmark1
16B-8
Revenue Sharing
• Common industry practice for a mutual fund or investment manager to share a portion of their direct fee (expense ratio) with service providers who perform some of the administrative duties they would typically provide.
• Services include: recordkeeping, participant statements, call center, fund distribution, sales and marketing.
• Examples: Distribution (12b-1) fees and sub-transfer agent fees.
The transfer of asset-based compensation from an investment manager to a third party
• Revenue sharing agreements are negotiated, therefore the amount of compensation may differ across providers for the same fund and share class.
Considerations
16B-9
Compensation paid by investment manager to administrator in excess of transparent fee.
Excess Revenue Sharing
* Potential vendor administrative limitations
Solutions for Excess Revenue Sharing*
Solutions for Excess Revenue Sharing*
Change share
classes
Change share
classes
ERISA Expense Account (PERA)
ERISA Expense Account (PERA)
Rebate to participants• Pro-rata
• Per-capita
Rebate to participants• Pro-rata
• Per-capita
Additional services
from Administrator
Additional services
from Administrator
Pla
n A
sset
s
Time with Recordkeeper
Excess Revenue Illustration
16B-10
Investment expenses account for approximately 75% of total 401(k) fees
Use of passively managed index funds can drive total plan costs down, while the inclusion of actively managed and more research-intensive asset classes can drive fees up.
Investment Menu Design
• “Do it for me” participant
Tier ITarget Date or Asset Allocation
Funds
• “Let me choose” participant
Tier IICore Actively Managed
Options
• “Let me choose” low-cost passively-managed participant
Tier IIICore Passively
Managed Options
• “Do it on my own” participantTier IVSDB*
*Self-directed brokerage accounts are not appropriate for all plans.
A menu designed around a tiered approach can offer investments to participants who prefer:
• Low-cost, passively managed options;
• “Do it for me” options; or
• “Do it on my own” options
16B-11
How Recordkeeping Fees Are Paid• 43%—Fully paid through investment revenue
• 39%—Direct fee in addition to investment revenue
66%—Company paid23%—Fee allocated to participants
44%—Pro-rata based on account balance56%—Equal dollar amount to all participants
12%—Shared by company and participants
• 13%—Wrap fee or added basis point fee in addition to the investment revenue
67%—Company paid
29%—Participant paid through reduction in investment return
5%—Shared by company and participants
• 5%—OtherSource: Annual 401(k) Survey Retirement Readiness, 2010 Edition, Deloitte Consulting LLP; International Foundation of Employee
Benefit Plans; International Society of Certified Employee Benefits Specialists. (n=466)
16B-12
Case Study
16B-13
Fee OverviewThe table below summarizes the current “all-in” fees for the XYZ Company, Inc. 401(k) Savings Plan
• All-in plan fees represent the investment expenses plus recordkeeping & administration costs
• Total recordkeeping and administration fees equal the revenue sharing component of the investment expenses
Bain (Vanguard legacy) Per Participant Dollars % of Assets
Investment Expenses: $386 $1,332,315 0.41% Fund Related Expenses $253 $871,643 0.27% Revenue Sharing $133 $460,672 0.14%Recordkeeping & Admin: Included Included Included Trustee Included Included Included Compl iance Testing / 5500 Included Included Included
Total Plan Fees: $386 $1,332,315 0.41%Total Recordkeeper Fees: $133 $460,672 0.14%
16B-14
Investment Expenses
Mutual fund expenses are comprised of portfolio management, fund administration, shareholder service and distribution fees (also called 12b-1 fees)
A plan’s investment expenses are driven by three factors:• Plan sponsor menu design• Plan sponsor investment product decisions• Participant investment decisions
Investment expenses account for approximately 75% of the “all-in” plan fee
16B-15
Revenue Sharing
No standard definition• Revenue sharing is typically defined as…. “the transfer of
asset-based compensation from investment management providers to a third party ”
Common industry practice for a mutual fund or investment manager to share a portion of their direct fee (expense ratio) with service providers who perform some of the administrative duties they would typically provide
• Service providers include plan administrators, recordkeepers, consultants, etc.
• Revenue sharing agreements are negotiated• Examples: 12b-1 fees, sub-transfer agent fees
16B-16
Investment Expenses & Revenue SharingBain (Vanguard legacy)
Fund NameMarket Value 3/31/2011
Percent of Total
Fund Expense Ratio
Fund Expense Dollars
Revenue Sharing Captured by Recordkeeper
Revenue Sharing Dollars Captured by
Recordkeeper
Vanguard Prime Money Market1 15,110,049$ 5% 0.23% 34,753$ 0.10% 15,110$ Vanguard Retirement Savings Trust2 12,619,964$ 4% 0.30% 37,860$ 0.15% 18,930$ Vanguard Short‐Term Bond Index (Investor) 2,340,159$ 1% 0.22% 5,148$ 0.10% 2,340$ Vanguard Inflation‐Protected Securities (Investor) 9,332,385$ 3% 0.22% 20,531$ 0.10% 9,332$ PIMCO Total Return (Admin) 9,052,279$ 3% 0.71% 64,271$ 0.25% 22,631$ Vanguard Total Bond Market Index (Investor) 5,304,658$ 2% 0.22% 11,670$ 0.10% 5,305$ Vanguard Long‐Term Bond Index 3,406,728$ 1% 0.22% 7,495$ 0.10% 3,407$ PIMCO High Yield (Admin) 5,423,451$ 2% 0.80% 43,388$ 0.25% 13,559$ Vanguard Wellington (Investor) 8,968,264$ 3% 0.30% 26,905$ 0.10% 8,968$ Vanguard Windsor II (Investor) 3,627,286$ 1% 0.35% 12,696$ 0.10% 3,627$ Vanguard Value Index (Investor) 4,040,486$ 1% 0.26% 10,505$ 0.10% 4,040$ Vanguard 500 Index (Investor) 47,022,320$ 14% 0.17% 79,938$ 0.10% 47,022$ Vanguard Growth & Income (Investor) 7,608,436$ 2% 0.32% 24,347$ 0.10% 7,608$ Fidelity Contrafund 21,711,110$ 7% 0.92% 199,742$ 0.25% 54,278$ Vanguard Growth Index (Investor) 3,955,643$ 1% 0.26% 10,285$ 0.10% 3,956$ Vanguard Extended Market Index (Investor) 6,983,160$ 2% 0.30% 20,949$ 0.10% 6,983$ Neuberger Berman Genesis (Trust) 18,128,427$ 6% 1.12% 203,038$ 0.35% 63,449$ Vanguard Mid‐Cap Growth (Investor) 3,644,505$ 1% 0.51% 18,587$ 0.10% 3,645$ Allianz NFJ Small‐Cap Value (Admin) 2,801,516$ 1% 1.00% 28,015$ 0.25% 7,004$
Subset of Fund Expense Ratio
16B-17
Investment Expenses (Continued)Bain (Vanguard legacy)
Fund NameMarket Value 3/31/2011
Percent of Total
Fund Expense Ratio
Fund Expense Dollars
Revenue Sharing Captured by Recordkeeper
Revenue Sharing Dollars Captured by
Recordkeeper
Vanguard Small‐Cap Value Index 5,540,655$ 2% 0.37% 20,500$ 0.10% 5,541$ Vanguard Small‐Cap‐Growth Index 7,632,552$ 2% 0.26% 19,845$ 0.10% 7,633$ Artio International Equity (Class A) 16,968,235$ 5% 1.29% 218,890$ 0.25% 42,421$ Vanguard Total International Stock Index 22,565,680$ 7% 0.26% 58,671$ 0.10% 22,566$ Vanguard REIT Index (Investor) 5,997,870$ 2% 0.26% 15,594$ 0.10% 5,998$ Vanguard Target Retirement Income 541,125$ 0% 0.17% 920$ 0.10% 541$ Vanguard Target Retirement 2005 1,678,525$ 1% 0.17% 2,853$ 0.10% 1,679$ Vanguard Target Retirement 2010 103,199$ 0% 0.17% 175$ 0.10% 103$ Vanguard Target Retirement 2015 7,981,507$ 2% 0.16% 12,770$ 0.10% 7,982$ Vanguard Target Retirement 2020 1,538,599$ 0% 0.17% 2,616$ 0.10% 1,539$ Vanguard Target Retirement 2025 9,687,599$ 3% 0.18% 17,438$ 0.10% 9,688$ Vanguard Target Retirement 2030 2,826,210$ 1% 0.18% 5,087$ 0.10% 2,826$ Vanguard Target Retirement 2035 15,331,598$ 5% 0.19% 29,130$ 0.10% 15,332$ Vanguard Target Retirement 2040 9,214,546$ 3% 0.19% 17,508$ 0.10% 9,215$ Vanguard Target Retirement 2045 19,347,108$ 6% 0.19% 36,760$ 0.10% 19,347$ Vanguard Target Retirement 2050 6,944,677$ 2% 0.19% 13,195$ 0.10% 6,945$ Vanguard Target Retirement 2055 125,707$ 0% 0.19% 239$ 0.10% 126$ Vanguard Brokerage Option 3,613,881$ 1% 0.00% ‐$ 0.00% ‐$
Total 328,720,097$ 100% 0.41% 1,332,315$ 0.14% 460,672$
Subset of Fund Expense Ratio
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Recordkeeper Fee Structures
Revenue Sharing Based:• Lower transparency: typically no hard dollar fees• Fees collected from revenue sharing from fund expenses• Theoretically, no cap on fees
Hard Dollar Based:• High Transparency: per participant or asset-based fee• Fees collected from sponsor and/or deducted from participant
accounts• Available revenue sharing may be used to offset hard dollar fee• “Excess revenue” account may be negotiated with vendors to pay
for other eligible plan-related expenses (consulting, legal, etc.)
XYZ Company is currently using a revenue sharing based structure to pay the incumbent’s recordkeeping and administration costs
16B-19
Recordkeeper Fee Structures
Options for excess revenue sharing1. Setup excess revenue account1
• ERISA expense account• Plan administrative expense reimbursement account
2. Rebate back to participants1
• To all participants- Pro-rata- Per-capita
• Only to those participants who were invested in the revenue sharing funds
3. Request additional services
1. Potential vendor administrative limitations
16B-20
Key Drivers of Recordkeeper Fees
Plan assetsNumber of participantsAverage account balancePlan cash flowNumber of locationsEducation requirements
• Onsite meetings• Electronic or printed materials• Multiple languages• Level of customization
Plan complexity• Frequency and number of payroll feeds • Multiple plan designs (eligibility, match, etc.)
16B-21
All-In Plan Fee Benchmarking
0.41% 0.36%
0.93%
0.72%
0.35%
1.72%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2.00%
Bain(Vanguard Legacy)
Bain(Vanguard Proposed)
Benchmark: Deloitte(Mean)
Benchmark: Deloitte(Median)
Benchmark: Deloitte(10th Percentile)
Benchmark: Deloitte(90th Percentile)
As a Percent of P
lan Assets
• Below we compare XYZ’s “all-in” fee to a universe of peer 401(k) plans• Competitive due to the significant portion of assets invested in low-cost
passively managed index funds as well as a competitive recordkeeping fee• Current fees are 43% below the median
Legacy Proposed
16B-22
Investment Expense BenchmarkingEach fund is compared to their style-specific asset class and further analyzed by active/passive management. For example: Allianz NFJ Small-Cap Value (Admin) is compared to actively managed small cap value peers.
Benchmark definitions:
• Morningstar: category average for all share classes
• Morningstar (no-load): category average for only no-load funds (represents a more institutional based benchmark)
• Lipper: category average for all share classes
• Morningstar (passive/no-load): passively managed category average for only no-load funds
16B-23
Investment Expense BenchmarkingComparison of actively managed equity fund options to appropriate peer universes
• All options shown in the table are below the benchmark, with the exception of Artio International Equity Class A
• Artio A share class exceeds the no-load benchmark but is below both the broader Morningstar and Lipper peers. Artio’s Institutional share class priced at 1.03% is available to XYZ Company and is lower than all benchmarks. Note: revenue sharing would decrease from 0.25% to zero.
VanguardWindsor II(Investor)
VanguardGrowth &
Income (Inv)
FidelityContrafund
NeubergerBerman
Genesis (Trust)
Vanguard Mid-Cap Growth
(Investor)
Allianz NFJSmall-Cap
Value (Admin)
ArtioInternationalEquity (Class
A)Fund Expense Ratio 0.35% 0.32% 0.92% 1.12% 0.51% 1.00% 1.29%Morningstar (no-load) 0.99% 0.99% 1.05% 1.17% 1.16% 1.25% 1.14%Morningstar 1.24% 1.24% 1.32% 1.39% 1.40% 1.47% 1.43%Lipper 1.25% 1.23% 1.43% 1.41% 1.41% 1.53% 1.36%
0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%1.60%1.80%
Expe
nse
Rat
io
16B-24
Lower Investment Expenses Available
Based upon a 13-month average fund asset values, XYZ Company is eligible for lower priced share classes for 20 fund options
Utilizing lowest-priced share classes would result in:• 27% reduction in total investment expenses ($362,500
annual savings)• 70% decline in revenue sharing/recordkeeping offsets
($318,800)
16B-25
Lower Priced Share Classes (Based upon 13-month average fund values)
Ticker Fund NameExpense Ratio
Expense Reduction
Ticker Fund NameExpense Ratio
Expense Reduction
NA Vanguard Retirement Savings Trust 0.30% VQNPX Vanguard Growth & Income (Investor) 0.32%
NA Vanguard Retirement Savings Trust (III) 0.15% VGIAX Vanguard Growth & Income (Admiral) 0.21%
VBISX Vanguard Short‐Term Bond Index (Investor) 0.22% VIGRX Vanguard Growth Index (Investor) 0.26%
VBSSX Vanguard Short‐Term Bond Index (Signal) 0.11% VIGSX Vanguard Growth Index (Signal) 0.12%
VIPSX Vanguard Inflation‐Protected Securities 0.22% VEXMX Vanguard Extended Market Index 0.30%
VAIPX Vanguard Inflation‐Protected Sec. (Admiral) 0.11% VEMSX Vanguard Extended Market Index (Signal) 0.16%
PTRAX PIMCO Total Return (Admin) 0.72% NBGEX Neuberger Berman Genesis (Trust) 1.12%
PTTRX PIMCO Total Return (Inst'l) 0.47% NBGIX Neuberger Berman Genesis (Inst'l) 0.85%
VBMFX Vanguard Total Bond Market Index 0.22% PVADX Allianz NFJ Small‐Cap Value (Admin) 1.08%
VBTSX Vanguard Total Bond Market Index (Signal) 0.11% PSVIX Allianz NFJ Small‐Cap Value (Inst'l) 0.75%
PHYAX PIMCO High Yield (Admin) 0.81% VISVX Vanguard Small‐Cap Value Index 0.37%
PHIYX PIMCO High Yield (Inst'l) 0.55% TBD Vanguard Small‐Cap Value Index (Admiral)1 0.21%
VWELX Vanguard Wellington (Investor) 0.30% VISGX Vanguard Small‐Cap‐Growth Index 0.26%
VWENX Vanguard Wellington (Admiral) 0.22% TBD Vanguard Small‐Cap‐Growth Index (Admiral)1 0.10%
VWNFX Vanguard Windsor II (Investor) 0.35% BJBIX Artio International Equity (A) 1.29%
VWNAX Vanguard Windsor II (Admiral) 0.27% JIEIX Artio International Equity (I) 1.03%
VIVAX Vanguard Value Index (Investor) 0.26% VGTSX Vanguard Total International Stock Index 0.26%
VVISX Vanguard Value Index (Signal) 0.12% VTSNX Vanguard Total Int'l Stock Index (Inst'l) 0.15%
VFINX Vanguard 500 Index 0.17% VGSIX Vanguard REIT Index 0.26%
VINIX Vanguard Institutional Index (Inst'l) 0.04% VGRSX Vanguard REIT Index (Signal) 0.12%
‐54%
‐76%
‐34%
‐54%
‐47%
1. New Admiral share class expected to be offered by Vanguard September 2011.
‐35%
‐43%
‐50%
‐62%
‐20%
‐32%
‐42%
‐27%
‐54%
‐23%
‐31%
‐50%
‐24%
‐50%
‐50%
16B-26
Bundled Pricing Request For Information
A pricing Request for Information (RFI) was used as the basis for benchmarking XYZ’s bundled recordkeeping and administration costs and “all-in” plan fees
Candidates were asked to provide fees in three different structures: per-participant, asset based and flat dollar. Pricing policies within some organizations prevented a few vendors from providing bids in all three structures.
16B-27
RFI
Vendor Per Participant % of Assets Dollars Vendor Per Participant % of Assets Dollars
Per Participant NA NA NA Per Participant $109 0.11% $376,159Asset Based $133 0.14% $460,208 Asset Based $93 0.10% $322,146Fixed Dollar NA NA NA Fixed Dollar $109 0.11% $376,159
Per Participant NA NA NA Per Participant $62 0.07% $213,962Asset Based $98 0.10% $338,582 Asset Based NA NA NAFixed Dollar NA NA NA Fixed Dollar NA NA NA
Per Participant $83 0.09% $286,433 Per Participant $85 0.09% $293,335Asset Based $76 0.08% $262,976 Asset Based $76 0.08% $262,976Fixed Dollar NA NA NA Fixed Dollar NA NA NA
Per Participant $90 0.09% $310,590 Per Participant $85 0.09% $293,335Asset Based NA NA NA Asset Based $76 0.08% $262,976Fixed Dollar $90 0.09% $310,500 Fixed Dollar $97 0.10% $335,000
Schwab
T. Rowe Price
Vanguard (legacy)
Vanguard (proposed)
Fidelity
JP Morgan
M&I
Mercer
Below is a summary of each submitted fee proposal and includes: per participant; asset based and fixed dollar pricing models
• Certain vendors provide an incentive to use an asset based model. Consideration should be given to the Plan’s growth trends both in terms of assets and participants to determine the optimal model
Incumbent
Incumbent
Proposal 1
Proposal 2 Proposal 6
Proposal 3
Proposal 4
Proposal 5
16B-28
RFI Fee Structure: Per Participant
Vanguard (legacy)
Vanguard (proposed)
Fidelity JP Morgan M&I Mercer Schwab T. Rowe
Investment Expenses: 1,332,315$ 1,183,149$ 1,332,315$ 1,332,315$ 1,332,315$ 1,332,315$ 1,315,162$ 1,332,315$ Fund Related Expenses* 871,643$ 844,966$ 1,069,945$ 1,108,403$ 1,094,457$ 1,109,204$ 1,069,702$ 1,147,102$ Revenue Sharing 460,672$ 338,183$ 262,370$ 223,912$ 237,858$ 223,111$ 245,460$ 185,213$ Recordkeeping & Admin: NA NA 286,433$ 310,590$ 376,159$ 213,962$ 293,335$ 293,335$ Per Participant Fee NA NA 83$ 90$ 109$ 62$ 85$ 85$ Total Plan Fees: NA NA 1,618,748$ 1,642,905$ 1,708,474$ 1,546,277$ 1,608,497$ 1,625,650$
Rev. Share Excess (Shortfall) NA NA (24,063)$ (86,678)$ (138,301)$ 9,149$ (47,875)$ (108,122)$
Table below highlights some distinctions between the per participant fee proposals
• Revenue sharing, which can be used to offset the recordkeeping and admin fees, vary from provider to provider (refer to slide 36 for details)
• The revenue sharing excess (shortfall) row at the bottom of the table is the difference between recordkeeping and admin fees and revenue sharing. This represents how much the recordkeeper will rebate or (additional revenue required) in order to maintain the 401(k) plan
• Legacy and proposed fees are based upon the Plan’s revenue sharing as incumbent retains 100% of the revenue sharing as their compensation.
Incumbent Legacy
Incumbent Proposed
Vendor 1
Vendor 2
Vendor 3
Vendor 4
Vendor 5
Vendor 6
16B-29
RFI Fee Structure: Asset Based
Vanguard Legacy
Vanguard Proposed
Fidelity JP Morgan M&I Mercer Schwab T. Rowe
Investment Expenses: 1,332,315$ 1,183,149$ 1,332,315$ 1,332,315$ 1,332,315$ 1,332,315$ 1,315,162$ 1,332,315$ Fund Related Expenses* 871,643$ 844,966$ 1,069,945$ 1,108,403$ 1,094,457$ 1,109,204$ 1,069,702$ 1,147,102$ Revenue Sharing 460,672$ 338,183$ 262,370$ 223,912$ 237,858$ 223,111$ 245,460$ 185,213$ Recordkeeping & Admin: 460,208$ 338,582$ 262,976$ NA 322,146$ NA 262,976$ 262,976$ Asset Based Fee Structure 0.14% 0.10% 0.08% NA 0.10% NA 0.08% 0.08%Total Plan Fees: 1,792,523$ 1,521,731$ 1,595,291$ NA 1,654,461$ NA 1,578,138$ 1,595,291$
Rev. Share Excess (Shortfall) 464$ (399)$ (606)$ NA (84,288)$ NA (17,516)$ (77,764)$
Table below highlights some distinctions between the asset based fee proposals
• Asset based fees range from 0.08% ($262,976) to 0.14% ($460,208)• Incumbent and Vendor 1’s recordkeeping and admin fees are
essentially offset by revenue sharing in this pricing optionThree vendors provided a tiered asset based fee schedule in which the fee lowers as Plan assets increase
Incumbent Legacy
Incumbent Proposed
Vendor 1
Vendor 2
Vendor 3
Vendor 4
Vendor 5
Vendor 6
16B-30
RFI Fee Structure: Fixed Dollar
Table below highlights some distinctions between the fixed dollar fee proposals
• Fixed dollar models are less common in the marketplace• Fixed dollar fees range from $310,500 to $376,159• Revenue sharing, which can be used to offset the recordkeeping and
admin fees, vary from provider to provider
Vanguard (legacy)
Vanguard (proposed)
Fidelity JP Morgan M&I Mercer Schwab T. Rowe Price
Investment Expenses: 1,332,315$ 1,183,149$ 1,332,315$ 1,332,315$ 1,332,315$ 1,332,315$ 1,315,162$ 1,332,315$ Fund Related Expenses* 871,643$ 844,966$ 1,069,945$ 1,108,403$ 1,094,457$ 1,109,204$ 1,069,702$ 1,147,102$ Revenue Sharing 460,672$ 338,183$ 262,370$ 223,912$ 237,858$ 223,111$ 245,460$ 185,213$ Recordkeeping & Admin: NA NA NA 310,500$ 376,159$ NA NA 335,000$ Fixed Dol lar Fee Structure NA NA NA 310,500$ 376,159$ NA NA 335,000$ Total Plan Fees: NA NA NA 1,642,815$ 1,708,474$ NA NA 1,667,315$
Rev. Share Excess (Shortfall) NA NA NA (86,588)$ (138,301)$ NA NA NA
Incumbent Legacy
Incumbent Proposed
Vendor 1
Vendor 2
Vendor 3
Vendor 4
Vendor 5
Vendor 6
16B-31
Revenue SharingRevenue sharing agreements are negotiated between a recordkeeper and investment manager, therefore, these amounts can differ for the same fund from provider to provider
Table below highlights some of the differences potentially impacting the XYZ Company 401(k) plan
In addition, a recordkeeper will typically provide a greater amount of revenue sharing for a proprietary investment.
Vanguard does not provide revenue sharing to any outside party on any products, however for recordkeeping clients they do assume 0.10% for Investor shares and 0.02% for Signal shares.
Revenue Sharing Vanguard T. Rowe Schwab Mercer M&I JP Morgan Fidelity
Money Market 0.10% 0.00% 0.05% 0.00% 0.00% 0.00% 0.00%Stable Value 0.15% 0.00% 0.05% 0.00% 0.00% 0.15% 0.00%Fidelity Contrafund 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.35%NB Genesis 0.35% 0.25% 0.35% 0.35% 0.40% 0.25% 0.40%Allianz NFJ SCV 0.25% 0.25% 0.35% 0.35% 0.25% 0.35% 0.35%Artio Int'l Equity 0.25% 0.25% 0.40% 0.35% 0.40% 0.35% 0.40%
Incumbent Proposed
Vendor 1
Vendor 2
Vendor 3
Vendor 4
Vendor 5
Vendor 6
16B-32
RFI Investment Expenses
Chart below depicts the two components of investment related expense; investment manager expenses and revenue sharing
• Incumbent’s lower investment manager expenses are offset by higher revenue sharing. This reflects a recordkeeper’s decision to provide a greater level of revenue sharing on proprietary funds.
$- $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000
Vanguard (legacy)
Fidelity
JP Morgan
M&I
Mercer
Schwab
T. Rowe Price
Subset: Revenue Sharing Subset: Investment Manager Expenses Total Investment Expense
Incumbent
Vendor 1
Vendor 2
Vendor 3
Vendor 4
Vendor 5
Vendor 6
16B-33
Self-Directed AccountsIn addition to fees there are a number of qualitative features that should be considered in evaluating self-directed account programs are:
• Number of steps required to access account• Ease/difficulty of use• Amount of investment information• Web trading capabilities• Personal assistance accessibility
In terms of fees, none of the RFI respondents will charge a Plan Sponsor fee, however, annual participant fees range from zero to $150 per account.
$150
$0
$50 $50
$100
$0 $0 $-
$50
$100
$150
$200
Vanguard Fidelity JP Morgan M&I Mercer Schwab T Rowe
Participant Annual Fee:
Vendor 6Incumbent Vendor 1 Vendor 2 Vendor 3 Vendor 4 Vendor 5
16B-34
Loan Fees
Summary of the loan related fees compared to the RFI candidates:• Fees are typically borne by participants• The average loan setup/origination fee is $61 according to the Profit
Sharing/401(K) Council of America.• Many of the providers do not charge an annual loan maintenance fee
$40
$90
$61
$50 $50
$75
$50
$75
$50
$25 $25 $30
$25
$0 $0 $0 $0 $0 $0
$10$20$30$40$50$60$70$80$90
$100
Vanguard(Web or
VRS)
Vanguard(Phone)
Benchmark(PSCAAvg)
Fidelity JP Morgan M&I Mercer Schwab T Rowe
Origination Fee (per occurence): Maintanance Fee (annual):
Incumbent Incumbent Vendor 1
Vendor 2
Vendor 3
Vendor 4
Vendor 5
Vendor 6
16B-35
Case Study
16B-36
Observations• 50% Plan assets invested in stable value investment• 30% participants age 50+• Large number of single fund holders• Participants rarely re-allocate monies• Multiple locations
Considerations• Majority of participants will be invested in default option• Do-it-for-me investors typically more conservative
Plan Observations & Considerations
16B-37
Based upon thorough “Plan Analysis” & Committee Input• Current services providers• Plan demographics• Best practices (marketplace and our expertise) • Investment innovations• Analysis of recent and historical market volatility
Recommendations:• Evaluate marketplace through vendor search• Streamline participant experience
Recommendations
16B-38
Investment Menu DesignPros Cons
Current Menu
Part
icip
ant ▪ Familiarity with structure
▪ Publicly available information on fund choices▪ Do-it-yourself participants have opportunity to diversify among sub-asset classes
▪ Must decide on appropriate asset allocation strategy▪ 1/n theory (split assets evenly among all funds)▪ Tend to chase performance
Plan
Sp
onso
r ▪ Consistent with past practices▪ Traditional menu design
▪ Single fund investment risk▪ Large number of fund choices leads to lower participation rate
Proposed Menu
Part
icip
ant
▪ Helps simplify diversification decisions▪ Added diversification through use of less traditional asset classes within a 401(k)▪ Fund fact sheets detail underlying FoF investments▪ Likely lower overall expenses
▪ Do-it-yourself participants cannot choose one sub-asset class▪ FoF information not publicly available▪ Additional "fixed" administrative fees
Plan
Sp
onso
r
▪ Best practice for similar sized plans and demographics▪ Addresses concerns about single fund holders▪ Provides enhanced diversification typically not appropriate as stand alone options within a 401(k) (high yield, foreign bond, TIPS, international small cap, emerging markets)
▪ Additional fiduciary oversight▪ Increased participant education▪ Additional "fixed" administrative fees
Core menu of 15 mutual funds(Including 4 asset allocation funds)
Stable value, bond, balanced, large value, large growth, large blend, multi-cap, small value, small growth, global, asset allocation
Diversified Fund-of-Funds plus money market or stable value and a suite of Target Date Funds
Money market/stable value, diversified: bond, large cap stock, mid cap stock, small cap stock, international; 6-10 target date funds
16B-39
Investment Menu Design
Investment Menu
Do it for me
(Professionally managed one stop shopping -set it and forget it)
Build my own
(Create my own personal asset allocation strategy and diversify among six broad asset classes)
Target Date Funds:▪ Income ▪ 2035▪ 2010 ▪ 2040▪ 2015 ▪ 2045▪ 2020 ▪ 2050▪ 2025 ▪ 2055▪ 2030
6 core options:▪ Money Market/Stable Value▪ Diversified Bond Fund▪ Diversified Large Company Stock Fund▪ Diversified Mid-cap Stock Fund▪ Diversified Small Company Stock Fund▪ Diversified International Stock Fund
Two Approaches
16B-40
Target Date Fund Considerations• Glide path or roll down (equity/fixed income allocation over time)• Asset allocation• Asset classes• Underlying investments• Active/passive management• Name recognition• Off-the-shelf or custom
Notes: • Structure assumes continued investment throughout retirement, not
lump-sum distribution at retirement date. 20+ year time horizon in retirement requires attention to inflation and draw-drawn risk.
Do it for Me Investors
16B-41
‘Best’-in-Breed or Merely ‘Good-Enough’-in-Breed?
Off-the-Shelf• Convenient• Coordinated communications & recordkeeping
Custom• More control and more effort• Potential for lower cost• Potential for better performance
Off-the-Shelf Target-Date Funds:
16B-42
Off-the-Shelf Target-Date Funds:Roll downs differ dramatically
Glide Path
0
10
20
30
40
50
60
70
80
90
100
2055 2050 2045 2040 2035 2030 2025 2020 2015 2010 2005 2000 Retirement
Equi
ty A
lloca
tion
(%)
BlackRock Fidelity T. Rowe Price Vanguard Wells Fargo
2020
16B-43
Fund-of-Funds Overview
Investment Menu
Core menu and underlying asset classes
Money Market or Stable Value Diversified Bond Fund▪ Intermediate Bond▪ High Yield Bond▪ TIPS▪ Non-US Bond
Diversified Large Company Stock Fund▪ Large Cap Value▪ Large Cap Blend (Passive index)▪ Large Cap Growth
Diversified Mid Cap Stock Fund▪ Mid Cap Value▪ Mid Cap Blend (Passive index)▪ Mid Cap Growth
Diversified Small Cap Stock Fund▪ Small Cap Value▪ Small Cap Blend (Passive index)▪ Small Cap Growth
Diversified International Stock Fund▪ Foreign Value▪ Foreign Blend (Passive index)▪ Foreign Growth▪ Foreign Mid-Small Cap▪ Emerging Markets
16B-44
Fund-of-Funds Overview
Fund-of-Funds ConsiderationsAsset allocation of underlying investments▪ Equal weight▪ Barbell or core / satellite
Underlying fund options▪ Passive/Index ▪ Active lower tracking error managers▪ Active higher tracking error managers
Fees and expense ratios▪ Fixed administrative fee impact - Declines as assets per portfolio increase▪ Fund-of-fund weighted average expense ratio impacts - Active vs. passive managers - Asset allocation decision
16B-45
Participant Asset TransferPros Cons
Fund to fund mapping
Part
icip
ant ▪ Preserves participant investment elections ▪ Enables participant inertia (remaining
undiversified)▪ Imprecise mapping if similar asset classes not offered
Plan
Sp
onso
r
▪ Potentially simpler education▪ Permitted by DOL▪ Higher level of assets in core menu options lowers investment expense and spreads fixed cost over larger asset base
▪ Fails to address participant diversification concerns▪ Stable value monies not available for mapping until May 2010
Re-enrollment
Part
icip
ant
▪ Addresses passive participant behavior▪ Provides professionally managed solutions for participant asset allocation questions▪ "Opt out" available for those who want to make own decisions
▪ May be viewed as paternalistic▪ Participants may be defaulted into more aggressive asset allocations▪ Impact of continued market volatility
Plan
Sp
onso
r
▪ Limits fiduciary liability▪ Permitted by DOL under PPA 2006 ▪ Addresses lingering sponsor concern about improper participant diversification
▪ Education complexities▪ Increased education requirements by DOL▪ Stable value monies not available for re-enrollment until May 2010
Mapping participants from one investment option to another that is reasonably similar
Participants are transferred into the Plan's QDIA, unless they opt out and take action to make their own investment elections
16B-46
Fee TransparencyPros Cons
Current practice
Part
icip
ant ▪ No change from current practice ▪ Lack of fee awareness
▪ Potentially increased fund expenses▪ Potentially lower investment return due to increased fund expenses
Plan
Sp
onso
r
▪ Most common method in today's marketplace▪ No additional education required
▪ Inequality of fund revenue sharing▪ While still most common method, marketplace is moving toward full fee disclosure due to fee litigations
Participant fee disclosure
Part
icip
ant ▪ Addresses concerns raised by media
and government officials▪ Potentially lower investment fees▪ Fee transparency
▪ Raises undue concern and new questions about fees
Plan
Sp
onso
r
▪ Being pro-active regarding fee disclosure. Multiple Bills proposed in Washington (Representative George Miller's Bill 7/07 and 4/09; Senator Tom Harkin's Bill 12/07 and 2/09)▪ Equally distributed administrative fees
▪ Even lowest priced share classes might offer some revenue sharing▪ Education and context is required so fees are not the sole driver of participant decisions
Recordkeeping, administration and third-party advisor fees paid through the Plan's investments via "revenue sharing"
Mutual fund share classes are selected in order to cover these eligible plan fees
Revenue sharing is typically defined as a percentage of a mutual fund's expense ratio that is paid by a fund company to a third-party for conducting administrative functions
Full fee disclosure to participants by detailing administrative fees on quarterly statement.
Choose lowest priced share classes in order provide highest investment return for participants
• Equally distributed administrative fees
16B-47
16B-48
