ABC 401(k) Plan. Benchmark Fee Report. May 19, Report created by: James Jones Advisors Inc. (410)

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1 May 19, 2017 Report created by: James Jones Advisors Inc. (410)

2 Are Your Plan s Fees Reasonable? Introduction Fees and expenses associated with the management of a qualified retirement plan have become a central issue with lawmakers, regulators and the courts. Plan sponsors have a fiduciary responsibility under ERISA to determine if the fees paid by a plan to its service providers are reasonable and necessary. Since 2006, more than two dozen large 401k plan sponsors have been hit by class action lawsuits alleging that they breached their fiduciary duty to control and account for investment-related fees and expenses. The most prevalent allegations include: 1. The plan sponsor breached his or her fiduciary duties by failing to take into account excessive fees paid to plan service providers. 2. The plan sponsor failed to implement investment options prudently; specifically, selecting higher cost, retail class mutual funds when less expensive institutional class funds may have been more appropriate. 3. The plan sponsor failed to negotiate reasonable fees for administrative and investment services and disclose these fees to plan participants. 4. The plan sponsor engaged in prohibited transactions with a party in interest. As a result, the Department of Labor (DOL) has issued final regulations under ERISA Section 408(b)(2), requiring that contracts and arrangements between plans and service providers be reasonable. Additionally, under these new 408(b)(2) guidelines service providers have to disclose in writing a description of services provided to the plan, as well as the amount of compensation received in connection with the plan and any potential conflicts of interest. The primary goal of the regulation is increased transparency between the plan and service providers by ensuring that plan fiduciaries receive information regarding what services are being provided, who is providing the services and how much compensation each service provider receives. Benchmarking Plan Fees Determining reasonableness or fair market value is part art (qualitative) and part science (quantitative). It includes identifying and comparing the cost of operating the plan to the real or perceived value of the persons or organization(s) servicing the plan. It is important to note that ERISA does not require a plan sponsor to select the service provider or the investment options with the lowest cost. The Department of Labor has stated that fees are not the only factor to consider when comparing plan providers. It is not enough for a plan sponsor simply to know who has been compensated from plan assets; the plan sponsor also has a duty to demonstrate that a determination was made as to why the compensation being received by a service provider is fair and reasonable for the level of services being rendered. As in any transaction, the fair price relates to the value of the service being provided. Consequently, it can be reasonable to pay higher fees if a plan is receiving more or superior services. A plan sponsor is required to be able to demonstrate that a plan s fees and expenses are appropriate and reasonable given the goals and objectives of the plan and the needs of the plan participants. The first step in evaluating whether a plan s fees are reasonable is comparing the cost of a particular plan to the costs of a group of similar plans. While it can be argued that there are many variables to consider and that no two plans are identical, benchmarking the cost of your plan is necessary and beneficial, in order to: - help plan sponsors meet their fiduciary duties under ERISA - assess the reasonableness of current fees and services - make plan sponsors aware of fees paid directly by the company and costs embedded in a plan s investments - provide plans with a basis for comparing and negotiating their fees In general, plan expenses fall into three categories: 1. Plan Administration Fees: expenses associated with the basic administration of the plan, including: accounting, legal, recordkeeping and trustee services

3 2. Investment Fees: typically, investment fees will be the largest expense of the plan. In turn, investment fees can be broken down into an additional three categories: - Investment Management Fees: paid to the investment advisor for the performance of investment management services - 12b-1 Fees: an annual marketing fee which is included as part of a mutual fund s expense ratio and typically paid to the plan s financial advisor - Sub-Transfer Agent Fees: payment to the plan administrator or recordkeeper for providing plan participant account services 3. Participant Transaction Fees: expenses associated with optional services provided to individual participants, such as the fees associated with servicing a loan Besides identifying and comparing plan cost data, it is equally important to understand the relative complexity of a plan: i.e., plan design and administrative requirements and the effect they have on the overall cost. The test of reasonableness depends on the size of the plan, as well as the plan design and other factors. Key drivers in determining plan cost are: 1. total plan assets 2. number of plan participants 3. average participant account balances 4. asset allocation 5. plan features Usually, a plan with standard plan features, more assets and higher account balances will incur fewer expenses than a plan with a similar number of participants but less assets and lower average participant account balances. Conclusion It is a plan sponsor s fiduciary duty to control and account for plan and investment-related fees and expenses. The fee benchmarking report that follows is a useful tool for helping plan sponsors understand how a plan s costs compare to a peer group of plans of a similar size. It is not intended to make value judgments on the quality of the services being provided. Rather, it is an important and necessary first step toward evaluating a plan s costs in accordance with ERISA Section 408(b)(2). Fee Benchmarking Best Practices: Request statements of services and fees from your current service providers. Benchmark plan fees to ensure that they are reasonable and competitive using an independent, unbiased third-party. Conduct an annual review of fees and services as part of the plan s prudent review process. Update the plan s Investment Policy Statement to include policies and procedures to control and account for administration, recordkeeping and investment expenses. Monitor changes in the quality, frequency and type of services relative to the fees paid by the plan. Maintain a record of annual plan fee reviews in a fiduciary audit file. Key Provisions of 408(b)(2) Disclosure Requirements Applies to DC, 403(b) and DB plans but not IRAs, Simple IRAs or Sep IRAs Applies to Covered Service Providers (CSP) receiving $1,000 or more Examples of Covered Service Providers include investment fiduciaries, record keepers, brokers, accountants, custodians, insurance carriers and third-party administrators The following must be disclosed to the plan fiduciary in writing within 60 days of entering into a new arrangement or renewing an existing arrangement: 1. Services: a description of the services to be provided to the plan 2. Status: the CSP reasonably expects to provide services as an ERISA fiduciary or an RIA 3. Compensation: A description of all direct compensation A description of all indirect compensation A description of any compensation received in connection with the termination of the arrangement Hard dollar disclosure not required formula or basis points are permitted This article is for informational purposes only. In no way does Thornburg Investment Management assure, that by using this information, your plan is in compliance with ERISA regulations. TH2445

4 Total Number of Participants: 175 Total Plan Assets: $ 8,912,500 Plan Assets Your Plan Stable Asset/Money Market $ 1,225,000 Fixed Income $ 800,000 Balanced $ 875,000 Large US Equity $ 3,325,000 Mid US Equity $ 175,000 Small US Equity $ 262,500 International/Global Equity $ 787,500 Target Date $ 1,312,500 Specialty $ 150,000 Total $ 8,912,500 Total Plan Cost Comparison (%) Investment Recordkeeping Trustee Total Your Plan 1.03% 0.01% 1.04% Average Plan 1.07% 0.05% 1.12% Your Plan Average Plan

5 Total Plan Cost Comparison ($) $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Investment Recordkeeping Trustee Total Your Plan $91,799 $1,000 $0 $92,799 Average Plan $95,799 $4,777 $398 $100,974 Your Plan Average Plan Frequently Asked Questions Where does the benchmark data in this report come from? This benchmarking report was generated using the 401k Comparator, which is based on the 401k Averages Book database. The database is comprised of 201 product offerings from 70 providers. Products are placed in the appropriate universe based on their target market. Fee data has been updated through September 30, How is the custom Average Plan fee benchmark calculated? Your Plan's characteristics (Average Account Balance, Total Plan Assets and Number of Participants) are used to form a comparable subset of the 201 products in the 401k Comparator database. This subset is used to calculate your Plan's average plan fee benchmark. The universe used to calculate the Average Plan fee benchmark is based on tables that incorporate various average account balance sizes and participant accounts. Because every plan has a unique asset allocation the Average Plan benchmark reflects your Plan s specific asset allocation. If your Plan has an asset allocation of 40% Large Cap, 5% Mid Cap, 5% Small Cap, 10% International and 40% Fixed Income, then the Average Plan fee benchmark will reflect that same allocation. Thus, the Average Plan fee benchmark is customized to reflect your Plan s asset allocation, average account balance, total plan assets and number of participants. The number of products included in your benchmark universe is identified below each chart.

6 Total Plan Cost Range 1.40% 25th Percentile Your Plan 75th Percentile Total Plan Cost 1.05% 1.04% 1.23% Total Plan Cost About the Range This chart represents the range between the 25th percentile and 75th percentile, or the middle 50%. Reporting with ranges is helpful because outliers (typically showing up as the high or low) have less influence. Example: Assume there are 60 products in the universe. 30 of those products have total plan costs that fall at or between a 1% and 1.5% (which is the middle 50%); 15 of the products have total plan costs 1.51% or higher and 15 were 0.99% or lower.

7 Total Plan Cost Comparison with Revenue Sharing/Net Investment Split Net Investment Revenue Sharing Recordkeeping Trustee Total Bundled Your Plan 0.54% 0.49% 0.01% 1.04% Average Plan 0.55% 0.52% 0.05% 1.12% Your Plan Average Plan About this Chart This chart illustrates the Plan s net investment and revenue sharing amounts. Net Investment is the portion of the Investment Expense retained by the investment manager. Investment Expense represents any asset based charges applied to plan assets. To the extent that investment management fees, fund expense ratios, 12b- 1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or any other asset based charges are a part of a particular product in the database they are included in the Investment Expense of that product. Revenue Sharing is the portion of the Investment Expense received by other service providers to the plan. These other service providers could include but are not limited to recordkeepers, advisors and platform providers.

8 Investment Cost Comparison 1.40% Stable Value/ Money Market Fixed Income Balanced Large Cap US Equity Mid Cap US Equity Your Plan 1.03% 1.03% 1.03% 1.03% 1.03% Average Plan 0.83% 0.97% 1.19% 1.08% 1.23% Investment Cost Comparison 1.60% 1.40% Small Cap US Equity International/ Global Equity Target Date Specialty Your Plan 1.03% 1.03% 1.03% 1.03% Average Plan 1.33% 1.36% 1.38%

9 Investment Cost Comparison Range 1.60% 1.40% Stable Value/ Money Market Fixed Income Balanced Large Cap US Equity Mid Cap US Equity 25th Percentile 0.67% 0.91% 1.15% 1.05% 1.21% Your Plan 1.03% 1.03% 1.03% 1.03% 1.03% 75th Percentile 0.97% 1.08% 1.35% 1.18% 1.37% Investment Cost Comparison Range 1.60% 1.40% Small Cap US Equity International/ Global Equity Target Date Specialty 25th Percentile 1.30% 1.33% 0.94% 1.32% Your Plan 1.03% 1.03% 1.03% 1.03% 75th Percentile 1.47% 1.48% 1.13% 1.51%

10 Advisor Compensation Range 0.35% 0.30% 0.25% 0.15% 0.10% 0.05% 25th Percentile Your Plan 75th Percentile Advisor Compensation 0.25% 0.25% 0.30% Advisor Compensation About the Advisor Compensation Advisor compensation represents the fees received for services provided by commission and/or fee based advisors. Advisor services may include but are not limited to provider search and evaluation, investment selection and review, participant education and meetings. About the Range This chart represents the range between the 25th percentile and 75th percentile, or the middle 50%. Reporting with ranges is helpful because outliers (typically showing up as the high or low) have less influence. Example: Assume there are 60 products in the universe. 30 of those products have advisor compensation that fall at or between a 0.25% and 0.75% (which is the middle 50%); 15 of the products have advisor compensation 0.76% or higher and 15 were 0.24% or lower.