Walking down a German street, I came across a sign that read, “negative-zins-finanzierung,” or “negative interest financing.” In a true sign of these times of global central bank intervention and negative deposit rates, a company is offering negative financing for small-ticket items purchased on credit. They will pay you to loan you money to make a purchase. Other bank advertisements around the streets of Berlin boasted that their negative deposit rates for savings accounts were less than their competitors. The German bund trades at a negative rate, meaning that you can pay the German government for the privilege of loaning them money.
In this global low-rate environment, plan sponsors need to be especially focused on not only the expenses they pay, but also how they pay them. There are certainly no plans that pay for themselves.
The complex option
Plan sponsors have options for paying for their plans. They could just write a check for the services they receive. The more complex option would be to choose investment options that generate revenue to pay for plan expenses. Somewhere in the middle is charging the expenses to participant accounts. Let’s focus on the complex option: Revenue sharing. Certain investment options charge investors higher fees above management expenses in the expense ratio which can be used to offset other provider fees in the plan, such as recordkeeper or adviser costs.
The following are common:
· 12b-1 fees: The “distribution” and “marketing” fees attached to some mutual funds created a trail for brokerage firms to help pay for marketing costs. If the investments in your plan have 12b-1 fees attached to them, make sure that that revenue being sent to the recordkeeper is being used for the services in your plan.
· Sub-TA fees: Sub transfer agency fees (or Sub-TA) are used to compensate a third party for participant accounting services, such as a recordkeeper.
The revenue described is sent to the recordkeeper, who aggregates the money and rebates it back to the plan, which is then used to pay plan expenses. If there isn’t enough revenue to cover expenses, the plan pays by check. If there is more, the plan will have a surplus in an ERISA account. This ERISA account can be used to pay future expenses, or rebated back to participants, with effective revenue equalization policies being an important factor to also consider.
This revenue does come at a cost, however. Revenue is added to the net expense ratio of the investment options in the plan, and may detract from potential returns or increase tracking error. It also is quickly becoming an antiquated way of paying plan expenses.
On the bright side, at least we’re not paying for the privilege to loan money.
This information was developed as a general guide to educate 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. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
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