From the March 2012 issue of Treasury & Risk magazine

Unbundling 401(k) Fees

Additional fee disclosures could send plan sponsors shopping.

The Labor Department’s long-awaited regulations on 401(k) fee disclosure are here at last, and the pressure is on. As pricing of defined-contribution plans becomes more transparent, companies could start looking for a new plan or provider.

It may seem odd that companies don’t grasp what something costs. But an October study by consultancy Callan Associates indicates that while companies appreciate the importance of 401(k) fees, “the number of sponsors that are unclear about the status of their plan’s fees is remarkable,” says Lori Lucas, Callan’s defined-contribution practice leader.

According to the survey, about 13% of plan sponsors don’t know what administrative fees apply to their company stock fund. And of those whose plans use revenue sharing, about a fifth do not know how many of their funds pay revenue sharing.

David Wray, president of the Plan Sponsor Council of America, says fee creep is one reason for the knowledge gap. “Most plans were started in the nineties,” he says. “Some newer plans have failed to negotiate fees with their providers as their assets and participation grew.” He argues that large companies are prepared for the disclosure regulations and “already negotiate fee schedules with providers.”

More fee disclosure may encourage companies to move away from the bundled approach, typical of larger retirement-plan providers, that offers a single pricing structure covering both investments and services. Deloitte Consulting’s 2011 401(k) benchmark survey found 76% of companies use the bundled model.

Providers of bundled 401(k)s negotiate administrative and investment fees with non-proprietary funds on their platforms, a process that can obscure exactly who pays what. Revenue sharing may mean some participants end up paying more than their share of costs, while others pay less.

The transparency mandated by the disclosure rules will force bundled providers to do a better job of breaking out their costs, Wray says. It could also push plan sponsors toward alternatives.

Jim Danaher, managing director of defined-contribution solutions at Northern Trust, says he’s seeing a lot of shopping around by companies, and they’re looking separately at record keepers and best-in-class funds. “It augurs well for the unbundled model,” he says.

“Downward pressure on fees is absolutely making things more competitive,” Lucas says. “In this evolving transparent environment, plan sponsors are moving away from a model where the cost of the plan and the way fees are paid are integrated. Of course, this plays into a tendency toward third-party record keepers.” 


For a look at how to make 401(k) plans work for employees, see Cheers for 401(k) Tiers.




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