Human Capital & Careers

Employers Cut 401(k) Employee Costs

Considering their widespread worries about plan costs, however, not many companies are getting their arms around them in a comprehensive way.
Stephen TaubJune 14, 2004

A large number of companies are working to help cut their employees’ 401(k)plan costs.

Indeed, 60 percent of more than 140 employers reported said they have made or are planning to make reductions in investment management fees, which often make up 70 to 80 percent of a 401(k) plan’s cost, according to a new survey by Hewitt Associates, an HR outsourcing and consulting firm.

“Investment management fees — otherwise known as fund expenses — are typically the largest portion of total plan cost,” said Pamela Hess, a Hewitt defined-contribution consultant. “They are also the most manageable and predictable costs to reduce, as employers typically have a number of funds to select from that meet their 401(k) plan needs.”

Considering their widespread worries about such expenses, not many companies are getting their arms around them in a comprehensive way. Even though more than 70 percent of the respondents to the Hewitt survey said they’re concerned about the total cost of their 401(k) plans, 49 percent haven’t tried to evaluate those expenses, according to Hewitt.

How should companies go about corralling and cutting their costs? Hess said to ask the 401(k) provider for a breakdown of all fees associated with the employer’s plan — both explicit and implicit.

Some 401(k) providers, for example, bundle trustee and administrative costs into investment-management fees. That makes the non-investment costs somewhat “invisible” to employers and employees, said Hess. “In fact, many employers may believe they are getting these services free,” she adds.

The choice of funds is another important way companies can hold down costs. According to Hewitt’s survey, 60 percent of employers said they offer low-cost funds available only to institutional investors as a way to cut 401(k) plan costs.

Also, nearly one-third of employers with defined-benefit and defined-contribution plans use the same investment manager for both their pension and 401(k) plans as a way to leverage underlying assets and lower investment-management fees when institutional funds are used. The practice produces “economies of scale,” according to Hess.