Compliance Program Expenses.

There are several programs that have been developed to assist public entity employers with GASB 45 compliance. Some offer a turn-key, "soup to nuts" approach to compliance while others offer only a portion of the services needed to build an effective compliance program. Of course each of these providers expect to be paid a fair price for their services. Some of these fees are explicit and easily recognizable, while others are layered into investment products that are more difficult to identify or quantify. Some of the more common types of fees and expenses found today in GASB 45 program  solutions are as follows:

1. Program Sponsor, Trustee and Custodial Fees: Several providers of financial services to public entities are coming together to provide programs or platforms through which GASB 45 compliance can be attained, usually through a lead Program Sponsor. These Program Sponsors typically have a specialized expertise of their own, and then work to build teams of financial services providers that possess additional skills and product offerings. They then package combined solutions for GASB 45 compliance. Programs typically provide pre-drafted board resolutions and legal documents, benefit plan consulting, and ongoing support in the maintenance of the mandatory "Substantive Plan" which is the dynamic framework of the GASB 45 compliance solution. Trustees are employed to hold, and in many cases invest the funds deposited by public entities for the purpose of satisfying their OPEB obligations. GASB 45 requires that any funds set aside by a public entity for the purpose of satisfying this obligation be placed into an irrevocable trust so that the funds are free from the claims of creditors as well as safe from invasion to satisfy unrelated budgetary needs.  Trustees are highly regulated entities who are paid to provide fiduciary oversight. Particularly in the case of Discretionary Trustees this fiduciary oversight can greatly reduce the potential risk of personal liability to the leadership of the public entity as concerns the holding and investment of assets. Trustees also provide pre-drafted trust agreements designed to comply with the legal requirements of the GASB 45compliance solution as well as state law, and are often highly customized to meet the specific requirements of the client.

Because Trustees are responsible for holding trust assets for the benefit of their clients, they are also typically responsible for providing custodial services. These services are either provided directly by the Trustee or through a third party Custodian, and include safekeeping of securities, income collection and distribution services.  Program fees and Trustee fees can include an annual base fee, as well as fees that are charged as a percentage of the assets accumulated and invested through their proprietary program. These asset based fees are typically charged in the form of "basis points" or "bps", which are charged against the fair market value of the assets as calculated by the Trustee on a given date. To illustrate the math, one hundred basis points (100 bps) is equal to 1%, fifty basis points (50 bps) is equal to 0.5%, and so on. The Custodian's fees may either be a part of the Trustee's fees or charged separately. You may also find that some Custodians are charging "transaction fees" for executing buy and sell transactions for securities, as well as distribution and wire fees.

2. Actuarial Fees: As mentioned above, an actuarial study will be the first step required in the GASB 45 compliance process, and these studies should be updated every two years. Not every actuary has experience calculating OPEB liability in accordance with GASB's expectations, so it is important to find one with the right knowledge and experience that you trust and can work with long term. Though a Program Sponsor may recommend an actuary to you, you should contract directly with the actuary to be certain that they work directly for you, rather than working under an arrangement to accumulate assets for the Program. Actuaries may charge either a set project fee or charge by the hour.

3. Investment Management Fees: In addition to the fees listed above, programs designed to provide GASB 45 compliance may charge separate investment management fees. These fees may consist of base fees and asset fees as described above, and may be charged directly by the Trustee or a third party Investment Manager. There may also be fees and expenses charged indirectly through the investment vehicles selected by the Program, usually mutual funds, which in some portion may be rebated back to the Trustee or Investment Manager. These fees are charged to cover the administrative and research expenses of the funds, and may vary significantly depending on the management style and the nature of the corresponding investment products. Styles or products that require greater diligence and monitoring will generally have higher fees, though remember that they might not necessarily have better performance. Mutual funds may assess many different types of fees. You should be diligent to learn exactly what fees are charged by each fund recommended by the program's Investment Manager, as well as whether or not any portion of these fees are rebated back to a participating service provider within the  program. Mutual fund fees may include:

(a) Purchase or sales charges. Often called "front-end loads" or "back-end loads", purchase or redemption charges can significantly reduce the amount of money available to pay benefits in the short term, and may only make sense for deposits that can be devoted to very long time horizons so to allow for fund returns to make up for the expense. Other funds are called "no-load" funds, because they do not charge any one-time fees upon purchase or redemption of the fund. (b) Annual management fees. All mutual funds charge some sort of annual management fee against the assets of the fund, which is again varies based upon the amount of diligence required to manage and monitor a particular investment style. These fees are again charged as basis points against the fair market value of the assets under management. Funds that charge front-end loads or back-end loads typically have smaller annual management fees than do no-load funds.

(c) 12b-1 fees. These are fees that are paid on-going by some mutual funds to pay brokers and other salespersons and to pay for advertising, and are then deducted from the assets of the fund. These fees may be paid by either a load or a no-load fund, and are very typical of retail classes of mutual fund shares. They are not usually paid by institutional share classes of mutual funds, so be sure to ask for institutional shares in order to keep your costs down.

(d) Sub-TA fees. Mutual funds will often pay fees to trust companies and Investment Managers for serving in the role of a sub-transfer agent, and then deduct these fees from the assets of the fund. The sub-transfer agent is tasked with providing services to the shareholders, or owners, of the funds. You will often see Trustees and other fiduciaries who are uncomfortable receiving 12b-1 sales incentives (due to rules prohibiting fiduciaries from having conflicts of interest) receiving Sub-TA fees, though many Trustees and fiduciaries are of the opinion that neither form of fund fee is appropriate to receive while serving in that capacity.

(e) Common and/or Collective Trust Fund fees. Common and/or Collective Trust Funds are trusts managed by a trust company as an internal mutual fund for the benefit of its clients. These funds are typically far less expensive than retail mutual funds in that they can purchase both individual securities or institutional class mutual fund shares, thus holding costs down. Each investor owns a proportionate share of the trust fund, and there are typically no front-end loads or back-end loads charged. These funds charge internal management fees designed to cover the costs of managing the investments, unitizing the fund shares, and to comply with audit requirements. These funds are typically an excellent value, but just as with mutual funds you should be aware of the fees assessed and who might be sharing in them.

Are there more?

Perhaps. Service providers in the financial services industry will always find creative ways to get paid. What matters most is dealing with providers who are quick to disclose all of their fees and to make their program transparent for your due diligence process. Your partnership with your GASB 45 compliance providers must be built on trust, which starts first with an understanding of the true value you will receive for the fees you will be expected to pay.