401(k) Plan Sponsors Are Focused on Fees

Administration fees are most common reason for switching record keepers

Stephen Miller, CEBS By Stephen Miller, CEBS May 26, 2016

As more plan participants scrutinize 401(k) fees, plan sponsors are re-examining how much they're paying their service providers for plan administration.

Plan sponsors, as fiduciaries, are also keeping a wary eye on investment fund fees so as to better serve participants and to lessen their risk of facing class-action lawsuits.

“For the first time, the aspect of reducing plan costs outranks all other priorities on which plan sponsors are directing their attention,” noted Julia Johnston-Ketterer, senior director at Market Strategies in Livonia, Mich., and co-author of the firm's May 2016 Retirement Planscape survey report.

Plan administration fees are the most common reason for switching record keepers, and likewise are an important driver of satisfaction and loyalty when client expectations are fulfilled, according to the survey, conducted among 1,435 plan sponsors from Feb. 15 to March 15.

The perception that a 401(k) services provider delivers “good value for the money” gives a firm’s image the biggest boost, “reinforcing the point that plan sponsors are seeking value from a provider” beyond the investment growth reflected on their participants’ quarterly statements, said Johnston-Ketterer.

“The aspect of value is not just about being the cheapest,” added Linda York, senior vice president of the financial services division at Market Strategies. “It’s more about justifying the fees that you charge and demonstrating the benefits of the service you provide in a way that’s meaningful to your target audience.”

Seeking Value

Denver-based Empower Retirement emerged this year as the provider that 401(k) plan sponsors associate most with providing good value for the money. While the firm serves 401(k) clients of all sizes, it “substantially improved its brand recognition in the smaller end of the market and is really resonating among these smaller plans,” said York.

“Fidelity Investments and Vanguard still rule the roost in the larger end of the market,” York continued, “benefiting from their well-earned reputation for being easy to do business with along with providing the greatest value for the money.”

Among other plan sponsors associated with “good value for the money” in this year report were Ascensus, Betterment, OneAmerica, Paychex, American Funds, ADP Retirement Services and Wells Fargo.

Fearing Lawsuits

Investment fund fees are the other big costs associated with retirement plans, and fund fees perceived as excessive are driving more class-action litigation against employers, CNBC reported last month. These lawsuits usually center around allegations that participants’ retirement savings were compromised because employers, as plan fiduciaries, failed to act in participants’ best interests and breached their duties under the Employee Retirement Income Security Act (ERISA) by allowing high fees, bad fund choices and conflicts of interest.

Plan sponsors’ fears of being targeted aren’t misplaced. For instance, St. Louis-based law firm Schlichter Bogard & Denton has developed a reputation for suing 401(k) plans, winning more than $300 million in settlements or awards since 2006.

Last year, the U.S. Supreme Court’s unanimous decision in Tibble v. Edison supported the arguments of class-action attorneys suing plan fiduciaries over high mutual fund fees in defined contribution plans. Now, “[plaintiffs’ lawyers] are looking for the next class-action bonanza, and I think it's most likely going to be in the ERISA area,” said Marcia Wagner, managing director of the Wagner Law Group of Boston, in an interview with CNBC.

And it’s not only big corporations that are at risk. A Minnesota collision shop is being sued over its 114-participant 401(k) plan. The primary argument in Damberg v. LaMettry’s Collission Inc., a class action filed in district court on May 18, is that LaMettry’s 401(k) plan used higher-priced retail class shares when lower-priced institutional class shares were available, exposing plan participants to excessive fees.

The suit shows that “even modest size 401(k) plans are fair game,” explained Catherine Gonzalez, counsel at law firm Nixon Peabody in Chicago. “There are lessons to be learned from the unprecedented number of ERISA fiduciary breach class actions being filed,” she advised, including:

Have a process in place to make prudent decisions about plan investments and the retention of service providers.

Continuously monitor and assess the ongoing prudence of the investments and the reasonableness of plan administrative expenses.

Make any changes needed based on such diligence.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.​


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