Investment-management fees are based on a percentage of plan assets and are levied by the mutual fund companies or other money managers that provide investment options. These fees are usually far larger than administrative fees and are always paid by the plan itself, meaning, ultimately, plan participants.

Behind the scenes, a lot of money moves around through various revenue-sharing arrangements between fund companies, money managers, and the various brokers, investment advisers, third-party administrators, custodians, and consultants that package, sell, or service plans. Often these behind-the-scenes transfers are invisible to plan sponsors. They take various forms: one-time finder's fees or annual 12b-1 marketing fees paid by fund companies to brokers and investment advisers to steer business their way, subagent transfer fees paid to third-party recordkeepers, and "shareholder-servicing fees" paid to vendors providing services to the plan. Identifying these fees is often difficult, especially for plans administered by insurance companies, since those are structured as variable annuities in which the various costs are typically aggregated into a single, opaque "wrap" fee.

In practice, financial-services firms earn so much money from investment-management fees that, except for the smallest plans, they can afford to underwrite the administrative fees. That allows them, or third-party administrators, to offer employers "free" retirement plans. It sounds like a sweet deal, but there's a rub. Fueled by stock market price increases and the steady influx of cash from participant contributions, the assets in a retirement savings plan often grow disproportionately faster than the number of participants in the plan and the cost of servicing them. Ultimately, that revenue is far beyond what it actually costs to run the plan.

Employers also have an opportunity to negotiate lower fees as their plan's average account balance soars, notes David Wray, president of Chicago-based Profit Sharing/401(k) Council of America, whose members are plan sponsors. Such growth suggests the provider is earning increasingly more asset-based income on the plan relative to the number of accounts it is servicing.

Exercising Your Leverage
The cost of a fee audit may be prohibitive for plans too small to negotiate significant price breaks. For plans with assets of $1 million to $50 million, Hutcheson typically charges somewhere between $10,000 and $25,000. For plans with $100 million-plus in assets, the cost is more like $30,000. The payoff, however, can be dramatic, averaging about $400,000 annually, says Hutcheson. Gnabasik says his clients' plans — with assets typically between $20 million and $500 million — are saving hundreds of thousands, even millions of dollars, over five-years through portfolio redesign and revenue-recapture programs.

Where a fee audit uncovers the opportunity for cost savings, the simplest and most effective way to recover money may be to request access to lower-cost investment options — either a different, lower-cost class of shares of the existing funds, or less-expensive alternatives. If the provider is still reaping excess revenues after a switch to the lowest-cost funds available, Hutcheson says it may be time to set up a revenue-recapture program.

It's not necessary to hire pension consultants to make sense of retirement-plan fees. Hutcheson says sponsors should feel no compunction about asking providers hard questions about costs. But, he adds, be prepared for spin. "I have found that every time I'm asked to perform an audit, it's because someone got an obscure answer to a question," he observes. Sponsors also can ask plan providers to complete the model 401(k) Plan Fee Disclosure Form available on the Department of Labor's Website since 2000. Just don't expect any of this to be easy.

"It's dirty, hard work," says Ward Harris, founder and managing director of McHenry Consulting Group in Emeryville, California, which provides consulting services for financial-services firms. "The ones that do it have to really be on their game, because there are a lot of deals going on out there and there is a lot of obfuscation."

Randy Myers is a contributing editor to CFO.

Under Fire

Behind-the-scenes revenue-sharing arrangements between retirement-plan providers may not only be unreasonable, they may also be illegal. In 2001, in a case not yet settled, the trustees of a 401(k) plan sponsored by Bridgeport, Connecticut-based Flyte Tool & Die Co. filed suit against Nationwide Financial Services Inc. and its Nationwide Life Insurance Co. unit. The trustees argued that Nationwide's retention of revenue-sharing funds linked to its plan constituted both a breach of Nationwide's fiduciary duties and a prohibited transaction under the Employee Retirement Income Security Act (ERISA).

The claim rests in part on an advisory opinion issued in 1997 by the Department of Labor. The department said vendors that are plan fiduciaries and either have discretion over the selection of its investment options or provide advice on selecting those options may not retain such revenue-sharing payments. In this case, the plaintiffs argue, Nationwide did keep them instead of passing them through to the retirement plan as required by the DoL's Frost opinion. On March 6 of this year, a federal judge in Connecticut dismissed Nationwide's move for summary judgment in the case. ERISA attorney Sherwin Kaplan says the lawsuit demonstrates that it's not too late for plan sponsors to investigate how their retirement plans' dollars are being spent and, if necessary, take appropriate action. Sponsors should be vigilant in asking questions of their plan providers, he says, and, if good answers aren't forthcoming, they should be prepared to take legal action. "Had these fiduciaries not sued Nationwide," Kaplan observes, "they could have been sued themselves by a plan participant." — R.M.

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