DC Plan Sponsors Are Focusing on Fees
Fees are front and center for sponsors of defined contribution (DC) plans like 401ks and 403bs according to a survey from Cogent with almost 1500 plan sponsors in Q1 2016. Whether it’s because of the 2012 DOL regulations requiring more stringent fee disclosure to employers (408b2) and their employees (404a5) or the rash of 401k lawsuits focused on excessive fees, fees are becoming a top priority to 401k plan sponsors according to the 2016 Cogent Retirement Planscape study.
So what is the takeaway for DC Plan Sponsors? Cogent noted that 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. Providers most associated with “good value for the money” across all size plans include:
- Empower Retirement
- Ascensus
- Fidelity Investments
- Betterment
- OneAmerica
- Vanguard
- Paychex
- American Funds
- ADP Retirement Services
- Wells Fargo
So are fees really going down? The national press like the Wall Street Journal seems to think so but the reality might be different based on the way DC plans are paid for. Plan fees are often calculated by looking at the expense ratio of the funds. Most funds have embedded revenue sharing cost to pay for plan expenses which seem to be declining due to the greater the use of less expensive ETFs and index funds as well as collective trusts.
But 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% as of September 30, 2015, revenue sharing increased .03% for both segments and record keeping increased for smaller plans by .02%.
Fees in the absence of value are always high so a strict focus on fees may lead to unsatisfying results. But, on the other hand, ignoring them can lead to fines, lawsuits and poor results for the company and their employees.
