Whether it’s because of avid media coverage, the rash of lawsuits, low returns or DOL disclosure regulations, DC Plan fees are becoming the major driver for defined contribution (DC) plan sponsors’ selection of money managers and record keepers according to reports by Cogent. And that point was driven home by HBO’s John Oliver who took his audience through the travails of his company’s search for a 401k record keeper with the focus on, you guessed it, fees. So what’s behind this movement and what are best practices?
In the record keeper report, Cogent noted that DC plan fees were cited as the most common reason by plan sponsors for switching providers and is an important driver of satisfaction and loyalty for record keepers as well as the leading brand enhancer.
Though fees are a major driver in the selection of money managers, brand seems to also be important with the big mutual fund companies and banks leading the list. Cogent’s “Top 10 DC Investment Managers Brand Equity by Plan Size” include:
| Rank | Micro | Small-Mid | Large-Mega | |||
| 1 | Fidelity Investments | Fidelity Investments | Fidelity Investments | |||
| 2 | Vanguard | Vanguard | Vanguard | |||
| 3 | Wells Fargo | Wells Fargo | Wells Fargo | |||
| 4 | T. Rowe Price | T. Rowe Price | T. Rowe Price | |||
| 5 | Charles Schwab Investment Management | Charles Schwab Investment Management | Charles Schwab Investment Management | |||
| 6 | American Funds | American Funds | J.P. Morgan Asset Management | |||
| 7 | J.P. Morgan Asset Management | Principal Funds | Prudential Financial | |||
| 8 | PIMCO | PIMCO | AB (formerly AllianceBernstein) | |||
| 9 | BlackRock | AB (formerly AllianceBernstein) | American Funds | |||
| 10 | Goldman Sachs | BlackRock | BlackRock |
Base: All Plan Sponsors
Source: Market Strategies International. Cogent Report™. Retirement Planscape®: May 2016.
A Forbes article entitled “How to Improve 401k Plans” offered four suggestions which start with, you guessed it, fees followed by diversification, no fads and best-in-class investments.
The logical conclusion for DC plan sponsors might be to get the cheapest funds (index) and the lowest cost service. And while John Oliver rails about high fees for smaller plans, these companies might need more service and hand holding which cost money.
Part of the issues with DC plan fees are that record keeping, administrative and advisory services are paid indirectly through revenue sharing embedded within the expense ratios of funds which can be confusing to understand and hard to decipher. Revenue sharing arrangement were created because plan sponsors wanted employees pay the costs of running the DC plan. Not wrong but some plans are considering actually paying the costs themselves which means more engagement in the negotiation of fees and greater transparency.
Best Practices?
- Understand the services needed for the company and employees
- Find the right advisor (fee based and fiduciary if possible) who can then help you find the right service providers and investments based on those needs
- Negotiate fees using the lowest share class possible considering collective trusts rather than mutual funds
- Include a diversified mix of low cost index funds and best in class active funds within a simple menu
- Document your prudent process
- Repeat periodically
