See-Through 401(k) Fees May Lead to Churn

Transparency on costs could lead to unbundling, provider switches.

Alison Borland, Aon HewittNow that 401(k) retirement plan sponsors are disclosing more about the fees paid to plan providers, will the increased transparency cause companies to rethink these relationships? Yes seems to be the prevailing answer.

Two Department of Labor rules that kicked into gear this year require plan providers and companies that sponsor plans to open the books on plan fees and investment costs to the country’s 72 million participants in 401(k) plans.

The information about fees must be easy to read and compare, in plain dollars and cents. The disclosures must include the types of fees paid, what they were for and who received them. Those receiving fees could run the gamut from providers to record keepers, investment firms, consultants, advisers and other third parties, depending on the plan.  

Historically, the allocation of 401(k) administrative fees among these parties involved a bundled, revenue-sharing model in which investment fees paid for some administrative expenses. Now that the lid is off on who is getting what, there is a heightened chance some plan sponsors may unbundle the process.

“Due to the increased transparency, we’re hearing more organizations saying, ‘Just unbundle the record-keeping fees,’” says Alison Borland, leader of retirement solutions and strategies at benefits firm Aon Hewitt in Lincolnshire, Ill.

Whether or not the transparency leads to some churn is open to debate.

“I think we may see a bit of provider switching, especially among those organizations that have been with a single provider for a long time,” says Borland, pictured above. “They may have been paying fees as a percentage of [plan] assets, meaning if the assets increased by 30%, they were paying 30% more in fees, even though no additional services were provided. They’re now having an eye-opening experience when they go to market.”

The experience is a positive one, says Joel Shapiro, senior vice president of ERISA compliance at 401(k) Advisors in Aliso Viejo, Calif. “In the past, sponsors that hadn’t hired an adviser or a consulting firm were never really well-versed and directed with regard to fees,” Shapiro explains. “Now they’re getting information in more understandable fashion—information that they should have been receiving from the consultant as an advocate on their behalf with the record keeper.”

Joel Shapiro, 401(k) AdvisorsBecause plan sponsors have a fiduciary duty under ERISA to prudently select and compensate plan providers and other third parties, Shapiro, pictured at left, says the fee transparency “will force a switch in plan sponsors among some providers, and weed out some of the less skillful advisers.” He adds, “Plan sponsors that haven’t gone to market in a long time, if ever, will do some benchmarking to find the best plan from a cost, investment and service standpoint.”

Not everyone agrees. Martin Schmidt, principal at HS2 Solutions, an HR solutions provider in Chicago, says fee disclosure has the potential to be truly transformational at the small end of the market, but predicts much of the same among larger companies.

“Large and jumbo employers have always done the due diligence to be sure they were paying for services that were fair and equitable,” Schmidt says. “While plan sponsors, in their role as fiduciaries, will be giving all this a closer look and are kicking the tires of what’s out there, I don’t see much churn ahead insofar as the providers. The new rules have been a catalyst for fees to decrease anyway.”

Shapiro of 401(k) Advisors also cites downward pressure on fees. “It has been our experience that the additional transparency is leading to more accurate and heightened competition amongst plan service providers, which is resulting in lower administrative fees,” he says, but adds that investment fees are “largely un-impacted.”

Smaller companies, on the other hand, must contend with paid plan advisers who may not be worth their salt. “It’s just been a very inefficient market for small plan providers,” Schmidt explains. “I think we’ll see more advisers go by the wayside, and those that remain morph into the consultant role. A lot of this stuff is still playing itself out.”

With regard to the disclosure rules having an impact on the investments within plans, a survey by Towers Watson shows the average number of investment options in 401(k) plans is decreasing. The portion of employers offering 20 or more investment options fell from 32% in 2010 to 24% this year, with 69% of respondents now offering between 10 and 19 investment options. The study does not indicate what factors are driving the decreases, however.

Shapiro does not expect many plan sponsors to swap one fund for another based entirely on expense. “At least I hope not,” he cautions. “I do see an impact in share classes, however. For instance, a typical mutual fund has various share classes, each with a different expense associated with it. We may see some dialing up or dialing down, depending on the revenue the fund needs to generate to offset the administrative expenses of the plan. For plan sponsors, this promises more flexibility.”

For plan participants, the rules are not a panacea. Employees still must read the fine print to understand their share of expenses. A recent survey of small business owners by ShareBuilder underscores this dilemma, noting that 80% of plan participants who read through the fee disclosures still had questions afterwards.

There’s disclosure and then there’s comprehension—they don’t always go hand in hand.


Russ Banham can be reached at


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