401(k)s Shifting to Fixed-Dollar, Per-Head Fees



Fewer sponsors are paying for recordkeeping services based on a percentage of plan assets

By Stephen Miller, CEBS Oct 28, 2015

More 401(k) plans are paying their third-party administrators (TPAs), which handle plan record-keeping and administration, based on a fixed-dollar amount per plan participant rather than fees based on a percentage of assets under management. Fixed-dollar, per-head fees are viewed by the plan sponsors that favor them to be a more-transparent and fair approach, according to an October 2015 report, NEPC 2015 Defined Contribution Plan & Fee Survey: What a Difference a Decade Makes, by Boston-based plan advisory firm NEPC.

Fixed-dollar fee arrangements now account for 47 percent of surveyed plans. “While previously popular among larger plans—those with $1 billion or more in assets—fixed-dollar arrangements are now increasingly prevalent among midsize plans with $100 million to $500 million in assets,” said Ross Bremen, a partner and defined contribution strategist at NEPC, in an interview with SHRM Online.

The survey also revealed a steady decline in overall plan fees, including record-keeping fees and investment fees, which are the annual expense ratios charged by fund managers.

“Given the liability environment we’re in, with a growing fear of participant class-action lawsuits over fund fees seen as excessive, there’s a continuing focus on negotiating lower and more-transparent fees for 401(k) and other defined contribution plans,” Bremen said. “We’ve also seen plan sponsors moving away from asset-based fee models and asset-based bundled-fee arrangements.” In bundled arrangements, all record-keeping fees are covered by some portion of the funds’ expense ratios and a specific fee level is not contracted.

Fee Structures

The estimated annual cost of plan administration for all plans, estimated on a per-participant basis (whether or not the plan used a fixed-dollar, per-participant fee arrangement) was $64 in 2015, down from $70 in 2014 and down significantly from $118 in 2006.

Plan administration fees (covering record-keeping, trust and custody services) generally were lower for flat-dollar plans in comparison with other fee arrangements in 2015:

Fees for all surveyed plans, averaged on a per-participant basis (whether the plan used asset-based fees, per-head fees or other arrangements): $64 per participant.

Fees for plans using a fixed-dollar, per-participant arrangement, averaged on a per-participant basis: $60 per participant.

Fees for plans using bundled fee arrangements (in which the funds’ expense ratios cover some portion of record-keeping expenses), averaged on a per-participant basis: $72 per participant.

Fees for plans using arrangements based on assets in the plan, averaged on a per-participant basis: $84 per participant.

Bremen added, however, that “there’s nothing that says the fixed-dollar arrangement has to result in lower overall payments. The service providers like the upside of the asset-based arrangements”—in which fees go up along with the rising value of assets in the plan—“so they may want a higher fee for the fixed-dollar arrangement.”

Also, fixed-dollar arrangements, “while more explicit, tend to focus on a set list of services,” Bremen said, “so there could be additional projects that require additional expenditures for the plan sponsor. The historical, bundled relationships are all-inclusive, and so you tend not to see the additional charges for additional activities.” Fees should not be assessed in a vacuum, he pointed out, and “low fees for the sake of low fees can do a disservice to plan participants if quality suffers.”

Revenue-Sharing Declines

Large plans have been the first to move to fixed-dollar fees and away from other arrangements because “they have the most assets and are the most focused on the potential for litigation,” Bremen said. They are also moving away from mutual fund revenue-sharing arrangements, in which a mutual fund company charges an additional fee as part of an investment fund's expense ratio and then refunds a portion to the plan's record-keeper to cover administrative costs.

Revenue-sharing has been cited in class-action lawsuits in which the plaintiffs charged that the practice results in investment menus with high-fee funds that enrich mutual fund providers and plan sponsors, at the expense of participants.

Still, Bremen expects revenue-sharing to be around for a while. “Over 80 percent of plans still have some level of revenue-sharing today. Plans that have no revenue-sharing tend to be the very large plans” that are most sensitive to fee arrangements that might trigger lawsuits.

The Department of Labor, which regulates employer-provided plans, “has continued to be supportive of allowing revenue-sharing practices,” Bremen explained. “The key is that products and services are reasonable for the level of fees. There are certainly instances where a bundled arrangement with revenue-sharing is more advantageous for the plan sponsors and the participants,” for instance, he noted.

While Bremen said he expects to see continuing moves by plan sponsors away from revenue-sharing, “I don’t think we’ll see revenue-sharing eliminated in the near future,” he said.

Midsize Plans Also Changing

The changes in fee structure are now moving down from large to midsize plans. “Over the last year, we’ve seen more plans with under $1 billion moving to fixed-fee arrangements and also looking to move away from revenue-sharing practices, as the practices that large plans have employed—and the advantages that they’ve enjoyed—have made their way down market.” These advantages include access to lower-cost institutional fund shares, which mutual fund providers are increasingly making available to midsize plans.

While fees have come down significantly for large and midsize plans, Bremen said, “It’s perhaps only the very smallest plans—those with 100 participants or less—that remain the ‘price takers,’ with the least ability to negotiate prices down.”

Importance of Low Fees C​ited

“Achieving lower costs is key to improving retirement readiness, as studies have shown that a 50 basis point difference in fees results in a 7 percent difference in the ending income replacement rate, which is equivalent to delaying retirement by two years,” said Fredrik Axsater, CFA, senior managing director and global head of defined contribution plans at State Street Global Advisors in San Francisco, in an interview with SHRM Online.

Axsater noted that a recent study by Aon Hewitt showed that 57 percent of plans with more than $1 billion in assets had most of their investment offerings structured as institutional-class fund shares, which charge lower management fees than investor (retail) share classes of the same funds. Aon Hewitt also found that 83 percent of employers charged workers for plan administrative fees by using mutual funds with revenue-sharing in 2011, but in 2015 that percentage dropped to 40 percent.


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

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