Fees continue to be an issue for 401k plans with the latest Wall Street Journal article (subscription required) citing plans by larger companies to move away from revenue sharing. The focus on fees can be distracting as fees in the absence of value are always high but the issue is front and center especially with the rash of 401k lawsuits that are now threatening smaller plans.
A Deloitte study notes that 18% of fees paid by participants in defined contribution plans are used to offset the costs of running the plan. Overall fees are declining according to an NEPC report that shows median participant charges dropping from $118 in 2006 and $70 in 2014 down to $64 in 2015. But some of the lower costs are due to the move towards low cost investments like index funds.
According to the 401k Book of Averages, expenses to run a plan embedded within the fund’s expense ratio are rising which does not make sense given the greater use of technology, industry consolidation and efficiencies which should result in higher productivity and lower costs. While expense ratios of a $2 million and $10 million plan dropped .04% according to the 401k Book of Averages as of September 30, 2015, revenue sharing increased .03% for both segments and record keeping fees increased for smaller plans by .02%.
As a result, larger plans are moving away from all-in-one pricing common with revenue sharing where participants pay all or most of the administrative fees though the expense ratio of the investments. Eighty-three percent of larger plans used this type of revenue sharing arrangement in 2011 according to a Hewitt report which is down to 40% in 2015 and likely to be even lower in the future. Not only does separating investment and administrative fees provide more transparency, it might also be more equitable.
Some plans are either going to all institutional priced funds which do not include revenue sharing in their expense ratio and charging everyone the same percentage to offset costs or are stripping out those additional fees from retail funds and crediting back fees to participants that invest in high revenue sharing funds while charging an additional fee to others that are using low paying funds like ETFs or index funds.
There is an argument for a flat fee per participant but is that really fair? For example, a $100 charge per participant would be 1% for a $10,000 account and .1% for a $100,000 account. In a report by TIAA, the suggestion is to waive fees for the 1st $10,000 which would benefit lower account holders who tend to be younger, lower income workers and then charge the same percentage to all participants which works like a progressive tax system.
Either way, it’s essential for plan sponsors to understand how much their participants are paying for administrative fees, which means they need to understand revenue sharing, and then through a prudent process make sure that fees are reasonable. It’s the law.
