Fees: 401(k) Services Market Heating Up

Fees: 401(k) Services Market Heating Up. Yesterday, we wrote that the least expensive retirement plan fund option isn’t always the best. That goes for plan service providers, too.

Fees are top of mind for defined contribution (DC) plan sponsors in 2017, according to Mercer. Moreover, a recent Callan survey shows that 26% of sponsors expect to conduct a search for a new record keeper this year — many in response to the DOL fiduciary rule, which says investment advice for plan participants must be in their best interest, not selected based on fees. Therefore, it’s important to closely evaluate what you’re getting for your plan dollars when shopping around for new vendors.

An article from the Society of Human Resources Management (SHRM) posted to the NEPC website points out that new players are making a splash in the 401(k) services market, which means more vendors vying for sponsors’ business. Smaller firms such as American Funds, Empower and Voya is beginning to gain a significant foothold in the marketplace, according to a recent Retirement Landscape report by Michigan-based market research and consulting firm Market Strategies International.

These firms are challenging big-name players like Fidelity and Vanguard, who’ve dominated the 401(k) services market for years. These behemoths had sizable leads, but now Voya and American Funds are making significant headway in the micro-plans segment (plans with less than $5 million in assets). And Empower is making noteworthy inroads in the midsize (plans with $20 million to >$100 million) and large plan (plan assets of $100 million to >$500 million) segments.

The smaller players’ brands are becoming more well known, thanks to well-executed marketing campaigns that play to their strengths. Moreover, these firms are adept at evaluating their markets’ key needs and developing targeted products and services to serve them. Needless to say, the 401(k) services landscape is changing in a big way.

As such, fees and pricing is clearly going to be a key element in the race for competitive advantage. But before making the leap to a new provider, plan sponsors should evaluate the service providers they’re currently working with, even if there’s room for improvement. As the old adage goes, the grass isn’t always greener on the other side of the fence.

Sponsors can gather competitive information through benchmarking studies, requests for information (RFI) or requests for proposal (RFP). Re-negotiating fees with an incumbent service provider is another option. It may be possible to renegotiate costs every 3-5 years, once the initial implementation fees have been recovered, according to the SHRM article.

In fact, NEPC’s 2016 Defined Contribution Plan & Fee Survey found that 81% of large 401(k) plan sponsors have renegotiated fees with their service providers since 2013. As a result, fees declined nearly 10% from 2014 to 2015.

Keep in mind, you get what you pay for. Paying lower fees to a discount provider while sacrificing services isn’t in the best interest of your participants. And doing what’s best for your participants to help them reach their retirement goals is more than just your role as a plan sponsor — it’s your fiduciary duty. And at the end of the day, fulfilling your fiduciary responsibilities by offering the best plan services at reasonable (not necessarily the lowest) costs is what’s best for you and your participants.

Robyn Kurdek

Robyn Kurdek

Freelance writer with nearly 2 decades of financial industry experience, with niche expertise in the defined contribution (DC) industry. I also have defined benefit (DB) plan knowledge. I write all types of content for retirement plan participants, sponsors and advisors, including web copy, newsletters, white papers, fact sheets, blog posts, financial wellness articles, and more. "I speak DC."
Robyn Kurdek

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