Employer sponsors of 401(k) plans may find themselves in a buyer’s market when it comes to administrative fees. If you haven’t revisited how much your plan is paying for recordkeeping services in a while, now is the time.
When Joe McCusker became CFO of Wenger Corp. a year ago, one of the first things he did was take a close look at the 401(k). He had run finance at OnStar, the General Motors subsidiary, but now for the first time he was a stand-alone finance chief with fiduciary responsibility for a retirement plan. He was determined to take care that the plan operated in the best interests of its participants, who were footing the bill for administration.
As is often the case, the same financial services firm that was performing recordkeeping services was also providing and managing the funds that comprised the plan’s lineup of investment options. Wenger, a maker of equipment for musical productions and performances, wasn’t getting any revenue sharing, an arrangement whereby a portion of investment-management fees is returned to the plan to offset the administrative fee. On top of that, the administrative fee was high, to say the least: 24 basis points (i.e., 0.24% of plan assets).
“I did a bit of research, and that wasn’t a competitive rate,” McCusker says. “I went to the financial services firm and said, ‘You guys collecting all the revenue share, and saying that’s the expense of managing the plan, isn’t a model we’re going to go forward with.’ ”
Did a knock-down, drag-out negotiation then ensue? Not at all. “They came down a lot more quickly than I thought they would,” says McCusker. The firm offered almost right away to trim the administrative fee to 16 basis points, and by eliminating some services McCusker thought weren’t providing much value, he was able to further pare the fee to 10 basis points.
“I just don’t think anyone had challenged them on the fees they were charging,” he says. “Our retirement committee had been more focused on how the funds were doing than on looking at the overall plan and deciding how to manage it in the best interests of participants.”
That wasn’t an isolated incident. Plans that haven’t taken a fresh look at fees for several years are very likely to be paying more than the market rate for similar-size plans. “Providers may occasionally lower their fees proactively, but for the most part they won’t,” says Michael Clark, a corporate retirement plan adviser with Raymond James Financial Services. “They’re never going to call and tell you that another provider will administer your plan more cheaply. It’s up to you to review the costs associated with the plan and take charge. A simple phone call or quick negotiation can save a lot of money.”
According to a recent Towers Watson survey of 457 large and midsized companies, 16% haven’t benchmarked their fees more recently than three years ago, and only 51% have done so within the past year. That’s unfortunate, as 48% percent of respondents said that the last time they performed such benchmarking, they were able to negotiate a reduction in administrative fees (see chart).
The average account balance for participants in Wenger’s plan is about $150,000, says McCusker. That’s well above the national average. But with only about 500 participants, the plan’s total assets are around $75 million — not pocket change, but surely not a game changer for a big financial services firm like the one Wenger uses (McCusker declined to identify it). That the firm caved so quickly on its administration fee is telling.
Rates have compressed fairly recently for a number of reasons. First, more financial-services providers have gotten into the 401(k) game, so competition is greater. Also, new fee-disclosure rules that took effect in 2012 have generally resulted in greater awareness of 401(k) fees. Some class-action lawsuits over high fees, brought against employers by plan participants, have also shone a spotlight on them.
“Now that people are paying more attention to fees, they’re just in a better position to negotiate,” says Josh Cohen, head of the institutional defined contribution business at Russell Investments. The firm is a fund manager and advisory-services provider to plan sponsors but does not provide administrative services.
Another factor is that 401(k) plan consultants like Russell have had some success persuading employers to hire them to help “unbundle” investment-management and administrative fees, when both services are from the same provider, and negotiate them separately.
When a bundled price is negotiated for fund-management and administrative services, “you can squeeze the balloon at one end and have low administrative fees but high investment fees, or vice versa,” Cohen says. “But the [the provider’s] cost for running a plan is dictated not by the amount of assets [as is the case for fund management], but rather on the number of participants. Each one is another person who calls the call center with questions or needs to take out a loan. So there tends to be a mismatch when you bundle the two together” for pricing purposes.
Still, many plan providers continue to price administrative services by asset volume (i.e., basis points). Russell Investments and other advisers are pushing back against that, advising clients to get their recordkeepers to charge on a per-participant basis. That particularly makes sense in these times of volatile markets.
“Certainly markets have gone up big and gone down big,” Cohen says. “When that happens, the provider’s revenue for running the plans changes significantly, even if the basis-point charge stays the same and the number of participants stays the same. Paying by the head is better for plan sponsors.”