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Assessing Fee Fairness: Characteristics of an Effective Plan Fee Structure

Benjamin Goodman and David P. Richardson
The Journal of Retirement Winter 2019, 6 (3) 23-33; DOI: https://doi.org/10.3905/jor.2019.6.3.023
Benjamin Goodman
is a vice president, Institutional Investment & Endowment Services, at TIAA in New York, NY
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David P. Richardson
is a managing director at the TIAA Institute Research in Charlotte, NC
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Abstract

This article develops a four-part framework for assessing the effectiveness of a retirement plan administrative fee structure. An administrative fee structure should satisfy three efficiency standards: (1) adequacy, (2) transparency, (3) administrative. It should also satisfy (4) a fairness standard based on both horizontal equity—participants with similar levels of assets pay similar levels of fees—and vertical equity—participants with a higher level of assets pay at least the same proportion in fees as those with lower asset balances. Using administrative data from a large plan, we demonstrate that an administrative fee structure charging a flat pro rata fee can satisfy all four standards. By contrast, we show that a pure per capita administrative services fee can satisfy the three efficiency standards but will fail the fairness standard. Indeed, our plan analysis shows that a flat per capita fee is highly regressive, with the lowest-asset participants paying equivalent pro rata fees that may be thousands of times larger than the highest-asset participants. A hybrid fee structure that uses a combination of per capita fees and pro rata fees, or capitates total fees paid by any individual, can reduce the unfairness of a pure per capita fee but will also weaken the efficiency standards because it is more complex to understand and administer.

TOPICS: Retirement, portfolio management/multi-asset allocation, legal/regulatory/public policy

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The Journal of Retirement: 6 (3)
The Journal of Retirement
Vol. 6, Issue 3
Winter 2019
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Assessing Fee Fairness: Characteristics of an Effective Plan Fee Structure
Benjamin Goodman, David P. Richardson
The Journal of Retirement Feb 2019, 6 (3) 23-33; DOI: 10.3905/jor.2019.6.3.023

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Assessing Fee Fairness: Characteristics of an Effective Plan Fee Structure
Benjamin Goodman, David P. Richardson
The Journal of Retirement Feb 2019, 6 (3) 23-33; DOI: 10.3905/jor.2019.6.3.023
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  • Article
    • Abstract
    • A PLAN ECONOMICS PRIMER: PLAN SERVICES AND THE ALLOCATION OF COSTS
    • CHARACTERISTICS OF AN EFFECTIVE FEE STRUCTURE FOR RETIREMENT PLANS
    • MEASURING FEE EFFECTIVENESS: PER CAPITA VERSUS PRO RATA FEES
    • ASSESSING FEE FAIRNESS: A REAL-WORLD EXAMPLE
    • OTHER CONSIDERATIONS
    • CONCLUSIONS
    • ACKNOWLEDGMENTS
    • APPENDIX A
    • APPENDIX B
    • APPENDIX C
    • ENDNOTES
    • REFERENCES
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