Is your 401 squeezed by costs? Stock market woes mean pension plan vendors may be frying to recoup lost fees, so take another look at your plan expenses - k - Retirement Plans

HR Magazine, Feb, 2002 by Charlotte Garvey

Human resource professionals who manage their firms' retirement benefits need to get smarter about what their companies now pay--and what they should be paying--for their 401(k) plans. As plan vendors see their revenues shrink in the wake of a stumbling economy and a volatile stock market, they may try to restructure their arrangements with employer-sponsored plans. Forewarned is forearmed, benefits experts say.

"Plan sponsors should be proactive and understand where they are and how their plan is structured currently, rather than finding out that you've got just three months to figure it out and move your business," says Joe Valletta, principal in HR Investment Consultants, a Baltimore-based consulting firm that helps plan sponsors assess their plans and potential vendors. "There's no question that, because account balances have decreased, the vendors are not making as much money as they were off the investment revenues," he says.

Indeed, during the heady years of stock market run-ups, some investment companies brought in business by marketing plans that had no fees attached--because the vendors' revenues were tied to, and drawn from, continually rising total plan assets. But times have changed, and no-fee vendors are telling clients they now will have to pay administrative expenses.

Getting a handle on your company 401(k) plan's expenses--both the employer's and the plan participants'--is useful in preparing for negotiations with plan vendors and also helps employers meet their fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA). The law requires fiduciaries to discharge their duties solely in the interest of plan participants. ERISA does not specify acceptable levels of plan fees, but it directs fiduciaries to agree to fees that are "reasonable."

Valletta advises clients to go through a 401(k) benchmarking process to figure costs and decide if they're reasonable. He and other experts say it's important to identify and compare costs, identify and compare services, discuss the findings with the company plan's provider, and move to change providers if your research tells you it's time to take that step.

Not a Simple Task

Crunching 401(k) expense numbers is not a straightforward task because plans come in many flavors, and vendors make money from plans in ways that are not always obvious. "It's common to see a wide variety of arrangements in 401(k) and other defined-contribution plans," says Matthew D. Hutcheson, a certified pension consultant in Portland, Ore.

Although plan sponsors--the employers--typically pick up the expenses for their defined-benefit pension plans, there's a wide variety of payment arrangements for 401(k) and similar participant-directed plans. Some plan sponsors pay for everything, including investment fees and costs. Some sponsors pay for almost nothing, with the result that nearly all fees are paid out of the plan's assets. In the middle ground are those plans whose expenses are shared by both sponsor and participants.

A vendor's pricing structure can be very complex. "Unless somebody sits down and puts a pencil to paper, they can't begin to figure it out," says retirement benefits expert Fred Reish, managing director of Reish Luftman McDaniel & Reicher, a Los Angeles-based law firm that represents both plan sponsors and plan providers.

Reish recently reviewed proposals from four different providers vying to run a 401(k) plan for a medium-sized company. A consultant had analyzed both the administrative fees and the investment-related charges in the four proposals, and concluded that the highest-priced proposal was twice as expensive as the lowest-priced proposal. Such wide disparities indicate that plan sponsors need to delve deeply into the details and become more sophisticated consumers, Reish says.

Some 401(k) costs are one-time fees for starting a plan, changing it or terminating it. Then there are ongoing fees for plan operations. The largest is an investment fee, which often is assessed as a percentage of plan assets (sometimes expressed as basis points; 100 basis points equals 1 percent) deducted directly from investment returns.

According to the latest version of the "401(k) Provider Directory Averages Book," a benchmarking product published by Valletta's firm, investment expenses car account for as much as 94 percent of total plan costs. A survey by Valletta's firm involving plans with 200 participants and an average of $8 million in assets found that total plan costs per participant averaged $526 per year, with investment expenses accounting for 91 percent of those costs. Other fees--the remaining 9 percent--related to administration of the plan and to individual services.

Plan administration fees can be charged as a percentage of total plan assets or as a fixed amount per participant, or they can be charged to individual participants for the execution of specific tasks such as making a loan or executing investment directions. Many plans use a combination of these fee structures.