Revisiting 401(k) Fees in a Post-Disclosure World

Employers should review not just pricing levels but overall pricing methodology

By Joanne Sammer Dec 4, 2013

More than a year after U.S. Department of Labor (DOL) rules took effect requiring 401(k) service providers to report their fees to plan sponsors using standardized tables (and for plan sponsors, in turn, to report plan fees to participants), employers have new opportunities to look more closely at their existing fee structures. This has allowed sponsors to identify new ways to reduce plan costs and ensure that their plans are getting the level of service that participants need, especially from the record-keeping firm that oversees plan transactions and any vendor (including the record keeper) that might provide sponsors with investment-management advice.

Moreover, given the ongoing tide of fee-related litigation affecting 401(k) plans, sponsors are understandably keen to keep plan costs in check.

In this new environment plan sponsors need to look not just at pricing levels but at the overall pricing methodology. For example, given the continued regulatory focus on appropriate plan fees, this is a good time for plan sponsors to push back on revenue-sharing arrangements in which a mutual fund pays a record keeper for plan expenses that otherwise would have been paid by the plan sponsor. Revenue-sharing can make a fund's inclusion in the plan a good deal for the record keeper but less so for plan participants.

In addition, many plan sponsors could benefit both financially and from a fiduciary standpoint by negotiating record-keeping fees and investment-management fees separately. This unbundled approach to fees can increase transparency and make it easier for the plan sponsor to demonstrate its efforts to minimize fees.

Focusing on Head Count

The market is moving away from basing fees on the number of assets being managed within a plan, which can include revenue-sharing arrangements, and toward pricing based on the number of participants in a plan or "head count," said Bill McClain, a principal at Mercer in Seattle. “When pricing is based on asset levels, the cost for administration will vary with the stock market, which makes no sense at all.” That's because as plan assets rise or fall based on market movements, plan fees will also fluctuate—even though any fee increase or decrease is likely to have no connection to the services provided, he explained.

As for revenue sharing, which may be embedded in a mutual fund option, plan sponsors can push their record keepers to credit any shared revenue they receive back to individual participant accounts in the form of earnings. “When you take revenue sharing out of the equation, prices can be based on head count, with participants seeing a quarterly fee on their statements that is very transparent and easy to verify,” said McClain.

Not surprisingly, midsize and larger 401(k) plans have more options to change and renegotiate pricing in this marketplace than do smaller plans, as the latter cannot offer the economies of scale needed to reduce record-keeping fees to their lowest reasonable level, and they often lack the critical mass of assets to move to less expensive investment options, such as institutional (rather than retail) mutual funds. However, the key is to ask for changes to fees and for more competitive fee levels. If plan sponsors don't put fees on the table for discussion, providers are unlikely to make the first move.

Seeking a Better Deal

The time is certainly ripe to re-evaluate fees, experts say. The marketplace for 401(k) plan record-keeping services is highly competitive, and plan sponsors may find that they have more leverage with current and prospective vendors than they realize. According to an annual defined contribution plan fee survey by NEPC LLC, an investment consulting firm based in Boston, median record-keeping fees declined from $92 per participant in 2012 to $80 per participant in 2013. Examining pricing over the past several years shows that this is a longer-term trend. For instance, median per-participant record-keeping fees in 2006 were $118, the survey found.

“If plan sponsors ask their current record keepers for a better deal, chances are good that they will get one,” said Ross Bremen, a partner at NEPC. “Most record keepers want to avoid a competitive situation.”

In addition to fees, plan sponsors can push for more and better services that mesh well with their priorities. “Sometimes, service standards are driven by what is easily measurable by the provider, even though those services may not be that important to the plan sponsor,” said McClain. “If plan sponsors are going to push for new service standards, they need to spend a little time thinking about what service levels are most important to improving the participant experience and guiding better outcomes.”

He advises plan sponsors to be vigilant once a deal is in place, making sure that the fees reflect the contract terms. “This is part of the responsibility plan sponsors have to participants because, obviously, plan participants are not in a position to do it themselves.”

How Low Can You Go?

Even though plan sponsors have leverage in this marketplace, they should wield it with care. Bremen urges employers to keep the big picture in mind when negotiating with vendors over fees and to focus on the entire value proposition for the retirement plan. “Plan sponsors need to be focused on obtaining the right level of plan services for a reasonable price and having the right set of investments at a reasonable cost,” he said. “Low fees are just one consideration, and they should never be considered in a vacuum.” Exemplary participant services may be worth an added expense, for instance.

In other words, trying to get the lowest fees possible strictly for the purpose of having low fees could undermine the smooth running of the plan and participants’ confidence in that plan. If plan sponsors are pushing record-keeping vendors to cut costs as much as possible, it could squeeze record keepers’ profit margins and force them to reduce service levels. “Plan sponsors could end up with, for example, shared-service platforms that allow less customization,” said Bremen.

At best, fee negotiations are a balancing act. “Even when you are trying to negotiate better terms than your current contract, don’t assume too quickly that you need to make pricing concessions to get those better terms,” observed McClain. “Plan sponsors have a responsibility to avail themselves of the savings that are out there. There is a perception that 401(k) plans are expensive. However, the real question is, are you taking advantage of the size of your plan and getting the best pricing available?”

Assessing Fees Across Participants

Aon Hewitt recently surveyed more than 400 defined contribution plan sponsors, representing over 10 million employees. The findings revealed a shift in how employers are charging for administrative/record-keeping fees—which are paid in full by employees in more than three-quarters of plans.

In 2013, 26 percent of plans charged record-keeping fees as a periodic line item to participants, up from 14 percent in 2011. The number of plans assessing record-keeping expenses via fund-based fees—for example, by using mutual funds with revenue sharing—decreased from 83 percent in 2011 to 52 percent in 2013.

According to Aon Hewitt, charging a flat fee for recordkeeping fees can have a significant impact on a participant's account balance over time. As an example, when administrative/record-keeping fees are charged as a $50 flat rate every year, a typical participant with a starting salary of $75,000 ends up having a balance at retirement that is $200,000 more than he or she would if the fees were instead charged as 0.25 percent of assets each year.

Joanne Sammer is a New Jersey-based business and financial writer.

DOL Grants 2-Month Grace Period for Annual 401(k) Fee Reporting to Participants

On March 19, 2015, the U.S. Department of Labor (DOL) proposed to amend its participant-level fee disclosure regulation by making a technical adjustment to an annual timing requirement. As amended, the regulation provides plan administrators with flexibility as to when they must furnish annual disclosures to participants and beneficiaries by providing a two-month grace period for the annual disclosures.

According to a DOL fact sheet, “During the interim period until the effective date of the direct final rule, EBSA [the Employee Benefits Security Administration], as an enforcement matter, will treat a plan administrator as satisfying the current "12-month rule" if disclosures are furnished within the new 14-month deadline.”

The current regulatory language states that the term at least annually thereafter “means at least once in any 12-month period, without regard to whether the plan operates on a calendar or fiscal year basis.” The amendment replaces “12-month period” with “14-month period,” so that the term “at least annually thereafter” means at least once in any 14-month period, without regard to whether the plan operates on a calendar year or fiscal year basis.

The DOL also issued the same amendment as a direct final rule, stating, “If we receive no significant adverse comment, the direct final rule will go into effect and we will not take further action on this proposed rule. If, however, we receive significant adverse comment, we will withdraw the direct final rule and it will not take effect.” ​

(To learn more, see EBSA Grants Flexibility for Annual 401(k) Fee Disclosure, SHRM Online Benefits, March 2015.)

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