VideoTPAs now had leverage over the mutual-fund companies because they could offer an array of mutual-fund families — say, a T. Rowe Price large-cap fund here, a Vanguard international equity fund there. The mutual-fund companies became lesser players, a situation they remedied by creating revenue-sharing arrangements with one another, opening up their technological architecture to permit trades out of one fund family into another, while providing their own recordkeeping services or hiring the TPAs to do it for them.
This had the good effect of permitting plan participants to significantly diversify assets across several funds and fund classes. On the down side, all the complicated side deals obscure actual plan costs. Not that the bundled fee isn't listed in the prospectus — it is. But the components of this fee (administrative expenses; trustee, audit, and legal costs; consulting expenses; statement fees; trading costs; potential performance bonuses; and the actual fund or investment fees) are unclear. "The difficulty is in peeling back the onion," says HR Investment's Valletta.
Moreover, under current ERISA law, the behind-the-scenes revenue sharing is essentially nobody's business, explains Robyn Credico, national director of defined-contribution consulting at Watson Wyatt Worldwide. "If all the fees are paid through revenue-sharing arrangements," she says, "technically you don't have to disclose anything." The Labor Department is looking to change the law by making revenue-sharing arrangements completely transparent.
The point is to find the best deal, not necessarily the lowest cost. "Plan sponsors have to understand what they're getting to make an informed decision — the lowest fee is not always the best value," says Jim Morris, senior vice president of institutional solutions at SEI Investments.
Shooting Blind
Sounds easy enough, but many plan sponsors are ill-equipped to peel the onion. In such cases, retaining an advisory firm like Resources for Retirement, Aon Consulting, or Watson Wyatt to pare fees down to their essentials offers recourse. Morris has another solution. "Demand to know what you're paying and how that compares with what others are charging," he says. "Many providers have already had themselves benchmarked and will hand over the results if requested."
Such was the case for RLI Corp. "Our recordkeeper, Principal Financial Group, itemized every source of revenue it would earn from our 401(k) plan and ESOP: management fees for its mutual funds, service fees it earned on outside mutual funds, and direct payments from our company," says Jeff Fick, vice president of human resources at the Peoria-based specialty-lines property-and-casualty insurance company. "We then compared those total fees with the services it would provide to our employees. Principal provided us with complete disclosure, which then helped us negotiate the best deal." Some companies feel more confident in turning to an outside party for such analysis.
Southwest Power Pool Inc. hired an outside firm to objectively examine all facets of its 401(k) plan. "It was just too much for us internally," says CFO Tom Dunn. "They did the spadework and were able to give us the net return on each fund after the fees were extracted. As a fiduciary, if you don't have the skill sets, you're just taking a shot in the dark."
And in these litigious times, a blind shot might ricochet.
Russ Banham is a contributing editor to CFO.
Reader Comments» Post a comment