It’s common sense that if you buy something, you get a bill for it. But buyers(plan sponsors and members) of defined contribution(DC)plans don’t always see the full bill when they pay for services. For a variety of reasons, full fee disclosure is lacking. It’s something that seems to come up in conversation in the defined contribution pension community, but has not been tackled by any one party involved. The reason for that may be the difficulty in getting all of the players to agree or even look at the issue in the same way. But the layers need to come off. Those in the vendor community, such as recordkeepers and money managers are fairly sure things are going pretty well and everything that needs to be disclosed is being disclosed. But there are those in the consulting community who differ. While they feel some providers are addressing the issue and providing full disclosure, there are others who do not. What it means for plan sponsors is that they are left with unclear requirements to disclose fees combined with inconsistent reporting, murky industry relationships and disagreement over how much to disclose. The end result is that plan sponsors are scratching their heads trying to figure out the best way to disclose information with inconsistent data.
FEES 101 Fee disclosure, despite what many plan sponsors may think, is already a part of the Capital Accumulation Plan(CAP) Guidelines. Section 4.4 of the Guidelines states that plan sponsors must give their members “the description and amounts of all fees, expenses and penalties relating to the plan that are borne by members.” Unfortunately for plan sponsors, there is no further explanation beyond the one stated in the Guidelines and it is left to them and their providers to seek out the best way to communicate fees and costs. Some argue that itemizing all fees is the best way, and others feel it is best not to give the sponsors and ultimately the members more than they can comprehend.
Although sometimes difficult to decipher, fees can be different for plan sponsors depending on asset size, member size, if they have a trusteed plan versus a bundled plan and finally if the funds are handled through an insurance segregated fund or through a securities-trust firm.
While not all of the DC plans in Canada are part of a segregated DC plan offered by an insurance company, many are. And with segregated funds, come a host of costs and fees that may or may not be fully disclosed to plan sponsors and ultimately plan members. “Pricing is an art and a science,” says Lori Bak, assistant vice-president with Sun Life Financial in Toronto. Fixed fees and costs can depend on asset size, member size, cash flow, average assets per member and a host of other things, she says.
But fees can be broken into different categories. First, so-called typical fees can include fixed fees such as administrative or withdrawal fees. In many cases they run about $25 per member per year for a plan and are fairly transparent to plan sponsors. “It’s a fixed fee, there are no surprises there,” says Greg Hurst, manager of pensions with the consulting firm of Morneau Sobeco in Vancouver. Those fixed fees, he adds, will appear on statements, brochures and are very well communicated by financial institutions.
However, there are other fees such as investment management fees(IMF)that the insurer, or provider, deducts from segregated funds to cover its cost for providing services.
DO AS I SAY Besides the type of information being an issue, there is the problem of inconsistency of information as well. Hurst notes that problems arise when plan sponsors and members see that the investment management fees charged are not the same as the management expense ratios disclosed by mutual funds in the retail sector.
Further, Hurst says some DC providers charge an operating expense on top of the IMF to capture audit fees and things like commission costs, but some providers do not. “That’s an issue, because clearly there is not a level playing field within the industry about operating expenses. I can see no reason why an insurer should be charging for operating expenses over and above their IMF that was negotiated with the client.”
But the rabbit’s hole goes even deeper. Some insurers may charge operating expenses as a percentage of the total fund, and others may not. Therein lies the first part of the murkiness of fees, fee disclosure and compliance with the CAP Guidelines. The lack of consistency and difference in arrangements makes it very difficult for plan sponsors to get the information they seek and provide the proper disclosure to members.
Hurst says the problem with the current system is that “plan sponsors totally rely on the financial institutions to tell them what the fees are.” He adds that usually all the plan sponsors know is the fee schedule they are provided by a recordkeeper or financial institution. On top of that, there are often other fees related to segregated funds that are not specifically disclosed in fee schedules. As a result, the plan sponsor would not be able to identify those fees even if they wanted to(unless they were specifically mentioned in the schedule).
But there is a perceived disconnect between how fees are calculated in the banking and securities businesses versus how they are disclosed in the insurance and CAP business. There has been a lot of effort directed towards catching up, says Joan Johannson, managing director with Integra Group Retirement Services in Oakville, Ont., with trust-based businesses already disclosing all fees and costs to their customers. But, she adds, it is not yet the culture in the insurance industry for CAP programs.
CAVEAT EMPTOR So if consistency of disclosure is the first murky issue of fee disclosure, the second one, according to Colin Ripsman, Canadian head of DC consulting with Mercer Investment Consulting in Toronto, is the way in which certain relationships are carried out.
He says sponsors and members are sometimes in the position where they are not entirely sure what costs they are paying because of these special relationships. The sequence of events, according to Ripsman, is as follows: The plan sponsor pays the recordkeeper the agreed fees and costs for service to the CAP plan. The recordkeeper in turn keeps some of that money and ultimately pays the investment manager.
Recordkeepers negotiate with the investment managers to secure a given price structure, often not passing the full saving back to the plan sponsor. “It casts a whole shroud over what you are actually paying for recordkeeping fees,” notes Ripsman. He adds that this practice also “skews assets towards larger investment managers.” That’s because managers with large DC relationships can offer better fee rates to the recordkeepers, based on the larger volume of assets placed with each recordkeeper.
ENOUGH IS ENOUGH However, despite the desire in the industry for more detailed and consistent information, there are schools of thought that say too much information can be confusing and reaches a point where it is more of a hindrance than a help to the plan sponsor.
Bak says there is only so much plan members really require. “Our approach is to look at ‘what does the member really need to know?’ We are comfortable relaying a single fee capture.” She adds that the full amount stated in the fee does show what items have been captured. As a result, she points out, there have been very few or no complaints coming through the firm’s call centre. And, says Bak, the firm has the backing of its clients because it has polled them and found out the way in which they wanted their fees communicated to them. Lewis Dubrofsky, vice-president and chief compliance officer with Fidelity Investments Canada in Toronto concurs, and says it’s important to have detailed information that is meaningful but not too detailed so that it confuses sponsors or members.
Still, many, like Ripsman, believe the Guidelines do not go far enough and are not specific enough to make the rules meaningful. Says Ripsman, “In my mind, when I look at the CAP Guidelines, I think that’s an area where the regulators missed the boat.” The problem, he stresses is that there is a whole list of fees(within the Guidelines)to be disclosed but it does not specify whether plan sponsors have to disclose them in the aggregate or in an itemized fashion. “If you have to break things down by component, then it makes it very difficult for any party, especially ones that have pricing power, to hide things in different buckets,” he adds.
Also, he stresses that some information is enough for members to make certain decisions but stating fees in the aggregate “doesn’t give you enough information to benchmark and confirm that your recordkeeping fees are reasonable.” However, while recorkdeepers do have bargaining power with third-party fund managers and there may be other undisclosed fees, notes Dubrofsky, “there are costs of wrapping those third-party funds and providing them to plan members.” He adds that really, what’s important to sponsors and members is that they understand the overall costs. “There is competitive information that recordkeepers will not necessarily want to disclose because that’s what they are paying for outside services. But it’s important to plan members that they are getting the entire picture,” he notes.
END POINT Some say the best idea to alleviate the confusion would be to mandate vendors to come to an agreement on how fees should be disclosed. “I think standardized disclosure is the way to go because…then what would happen is plan sponsors, plan members and consultants would be able to report and compare apples to apples,” says Dubrofsky. He says people in the industry are trying to comply with the spirit of things like the CAP Guidelines but there are different methods of disclosure which then causes confusion.
One other place to start, notes Ripsman, is a line-by-line itemization of fees paid by the plan sponsor. “If [the CAP Guidelines] is ever revisited again, I would think the simple solution is to require an itemized breakdown.” But, he adds, he doesn¡¯t see it happening anytime soon.
So what is of importance to the plan sponsors and their members in terms of fees? Johannson says one of the questions plan sponsors can ask is whether the recordkeeper retains net as well as gross unit values. “Anyone can get the gross unit value, what you need to define is the net unit value, and the difference between the two should account for the fees you are expecting to see in there.” The numbers can vary depending on cash flow, but generally, this is the number the plan sponsor can use to understand what they are paying for. She adds that because of the structure of the insurance firms’ recordkeeping platforms and the way in which segregated funds are made up, the firms can conceivably put costs associated with the plan into the segregated fund. As a result, plan members may not see that they are paying for a service and may inadvertently feel as if the plan is being provided as a benefit.
But Bak says fees are disclosed to members and it really depends on the firm and the way in which they disclose their fees. “The fees in a group plan are still significantly lower than in retail, no matter what they would pay on the street, it’s still a tremendous benefit for them.” For now, plan sponsors, if they want to get the best information, have to take small steps that may lead to more detailed disclosure down the road. Questions need to be asked.
Johannson, Dubrosky and Hurst all agree that plan sponsors have to ask the hard questions and find out what expenses are being borne by plan members when they make an investment. The ultimate point being: plan sponsors must take it upon themselves to get the answers they need and not wait for providers to give it to them. Says Ripsman, “Plan sponsors have to be more proactive in benchmarking their fees and taking action. They may not be able to break it down by component but they could see what a similar plan would cost in similar places.”
Joel Kranc is managing editor of BENEFITS CANADA. Joel.email@example.com.