According to the recently released “NEPC 2016 Defined Contribution Plan & Fee Survey” 82% of 401k plan sponsors have renegotiated their record fees since 2013 resulting in an almost 10% reduction from 2014 to 2015. While some plan sponsors and experts believe that leveraging buying power to lower defined contribution plan provider fees driven by lawsuits and prudent practice is just good business, many experts caution that the race to the bottom could hurt service and even retirement outcomes.
Lower fees are driven in part by a move to lower share classes highlighting the issues and problems with revenue sharing where a portion of the investment fees paid by participants are used to pay or subsidize the cost of the plan including record keeper and advisor fees. To get a better priced share class, 50% of 401k plan sponsors changed one or more funds in 2014 and 29% in 2015. Record keeper fees dropped from .46% in 2014 to just .42% in 2015.
After finding the right record keeper model for their company, plan sponsors indicated that measuring current fee levels is their biggest challenge. With new 401k and 403b lawsuits popping up almost every week, many based on the claim that plan sponsors did not properly pay and negotiate the best fee possible for their plan participants, it is a challenge for larger plans surveyed in the NEPC but almost impossible for smaller and mid-size companies who many experts believe will be the target of the next wave of lawsuits by local firms copying the model used against larger plan sponsors.
Under ERISA, DC plan sponsors have a fiduciary duty to make sure fees are reasonable. The first step is determining what they are which is not easy with the spider web of share classes and revenue sharing even with 2012 DOL fees disclosure regs 408b2 and 404a5 as the reports are difficult to decipher. Then the plan must conduct a documented benchmarking suggested annually along with periodic RFPs suggested every three-five years.
Most plan sponsors of all sizes rely on an advisor or consultant to help plan sponsors understand exactly what they are paying and whether it is fair. Though lawsuits, new laws and the press have made plan sponsors more focused on fees than ever, the rule is that fees need to be reasonable, not the cheapest possible although the bar for what is reasonable is getting lower according to the recent NEPC 2016 report.
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