Form 5500 Schedule C: Why is it not the correct way to compare provider costs?

1. Form 5500 Schedule C: Why is it not the correct way to compare provider costs? A SPECIAL PRESENTATION PREPARED BY BPAS FOR OUR FINANCIAL INTERMEDIARY AND PLAN SPONSOR CLIENTS

2. Why did the DOL recently make changes to Schedule C? • It was part of the DOL’s expanded effort for provider fee disclosure • Concept was to identify fees that are being charged to the plan and disclose them in a single location • Goal was to increase competitive nature of the marketplace through greater awareness of fees • Certainly, these are laudable goals from a fiduciary perspective

3. What went wrong in this effort? • Schedule C was intended as only one part of the fee disclosure initiative, along with Regulations 408(b)(2) and 404(a)(5) – it was not intended to summarize the total costs of a provider or a plan • Schedule C only details fees that are charged to plan assets over and above mutual fund expense ratios • It does not take into account several key components of a plan’s overall fee arrangement

4. Is it reflected on Form 5500, Schedule C? * A mutual fund’s total expense ratio includes all three items listed here. In many plans, this is the most significant component of total plan cost.

5. Why does it matter? Consider the ABC Company 401(k) Plan • Plan has $5 million in assets and 90 participants • Previous configuration: • Worked with a local brokerage firm • A regional TPA provided recordkeeping and administrative services • Used menu of mostly R and R3 share classes • Fee configuration: • TPA charged $1,500 base fee (charged to plan), $30 / participant / year (charged to plan), and retained sub-transfer agent fees from funds, which averaged 25 basis points (total compensation of $16,700 / year) • Broker retained 12b-1 fees from funds, which averaged 40 basis points (total compensation of $20,000 / year) • Mutual fund menu of R3 and R shares had average expense ratio of 140 basis points (net management fee of 75 basis points plus average total revenue sharing of 65 basis points, to TPA and broker). Net management fee to mutual funds of $37,500 / year (75 bps on $5M) • Total plan cost was $74,200 / year, or 148 basis points (all in)

6. What is the plan’s new configuration at BPAS? • Moved to institutional share menu with new Advisor • Fee configuration: • BPAS charges $0 base fee, $48 / participant / year (charged to participant accounts), plus 25 basis points platform fee, which is offset by any revenue sharing (total compensation of $16,820 / year) • Assume advisor is charging same fee (40 basis points / year) – for total compensation of $20,000 / year • New institutional fund menu (Vanguard Signal Shares, American R6, DFA, etc.) runs at 24 basis points, which includes 0 basis points of revenue sharing. Net management fee of mutual funds is $12,000 • Total cost is $48,820 / year, or 97 basis points (all in)

7. How does Schedule C look for both situations? Previous Configuration (previous recordkeeper) New Configuration (with BPAS) • Total cost = 148 basis points ($74,200 / year) • Total plan expenses reflected on Schedule C: $4,200 • Total cost = 97 basis points ($48,820 / year) • Total plan expenses reflected on Schedule C: $36,820 From merely reviewing Schedule C, the previous configuration looks to be significantly less expensive… when it fact it is 51 basis points higher in total cost to plan participants. The reason is, the prior configuration had most of its costs shifted to the underlying mutual funds (R3 share classes); these expenses are not reflected on Schedule C.

8. So what is the correct way to compare fees? • Begin by reviewing the 408(b)(2) notice • There is still significant variation in the information shown among providers, but that is a better way to understand total costs • There is still no replacement for the “Vendor Cost Comparison Matrix”, which you ask various firms to complete on their own (sign, date, attest to accuracy). BPAS can help you with this tool and provide a copy to summarize our fee arrangement. • The best approach is to tell all bidders to assume a menu of 100% Vanguard Signal Shares, to eliminate differences among funds (and revenue sharing considerations) in the analysis. This brings all fees to the table. • The question for fiduciaries is, “What is the total, all-in cost of services for our plan? …And how does the total break down into the three key components (Advisory or Trustee Services, Administrative Services, and Investment Management fees)?” • This is the standard on which plan fiduciaries will be measured – making sure that fees are reasonable in the aggregate for the mix of services provided

9. What if an advisor tells you that your fees are too high based on Form 5500? It is likely that the advisor either A) doesn’t understand the problems of using Schedule C to compare fees, or B) is using this approach, hoping it will create an opportunity for them to bid on your plan. Insist on a proper fee comparison of fees and services (use the vendor cost comparison matrix found in the BPAS Partner Toolbox). BPAS will help you obtain a proper comparison of fees, while highlighting the many additional services that are included in our offering.