Retirement plan providers are seeing a rise in sponsors shopping their defined contribution plans, setting off a 401(k) bidding war as employers get aggressive in their search for lower fees and better options.
As the fourth quarter approaches — the time when most companies make benefits decisions — many are digging into the question of whether they might be paying too much in administrative and recordkeeping fees and would like to see what else is out there.
“From now until mid-December, it is clearly our peak season,” said Mike Narkoff, senior vice president for Pennsylvania-based Ascensus, which provides recordkeeping and administrative services to more than 43,000 retirement plans and 1.5 million IRAs. “We do see most of our new clients onboarding in the later part of the year.”
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The advantage for new plans or those switching providers now is they can start up on Jan. 1, giving their employees a full calendar year to save as much as they can and maximize their savings for the year, Narkoff said.
A growing awareness that there’s sometimes a huge disparity in fees is what’s mostly driving the trend. Higher costs can leave retirement plan participants with far less in savings – sometimes hundreds of thousands of dollars – after fees are paid.
“Service and fees have always been the two most dominant features that employers and advisors look at. I would tell you, given the new (Labor Department) fee disclosure regulations and the (regulatory) scrutiny around fees, it is not as much about what the fees are, but more clarity around how they work and are they reasonable,” Narkoff said.
That’s not to understate the sensitivity to price, especially as an ever-shrinking number of companies move away from traditional defined-benefit pension plans to 401(k)s.
Of course, as fiduciaries, plan sponsors are under greater pressure than ever to act in the best interest of plan participants when selecting investment options, service providers and monitoring their choices.
Chad Parks, president of The Online 401(k), which specializes in web-based 401(k) plans for small businesses, said a lot of small- to mid-size plans are actively shopping.
Indeed, a recent survey by Cogent Research found that just 38 percent of all plan sponsors feel confident they are paying similar fees to those paid by their peers, though larger plans were more confident in their fees than micro- and small-plan sponsors.
Of the 73 percent of plan sponsors who said they received fee disclosure information from their plan providers last year, 46 percent said they plan to maintain their current fee arrangements. About one in five plan sponsors plan to request fee reductions, with 31 percent of mega-plan sponsors likely to take such action, according to Cogent.
“There is definitely heightened awareness of fees,” Parks said.
And if there’s not, there ought to be, he said.
“People signed up for the first thing to come along and they didn’t necessarily know this information,” he said. “Now they are armed with this information, so it is time to do a self-audit to make sure they are doing the right thing.”
Parks said many of the more entrenched service providers have yet to reduce their fees.
He pointed out that one of the largest 401(k) providers in the United States is still charging 250 basis points for administrative and recordkeeping fees. Parks says he doesn’t believe anyone should be charging more than 100 basis points in fees. His company, he said, charges 25 basis points.
As counter-intuitive as it might sound, starting a plan or changing a plan has become more complicated in light of new regulations such as fee disclosure. That’s because there’s more data available to compare.
There are also more choices, and even though the market is moving toward greater transparency, Parks doesn’t think plan providers make it easy for companies to make the switch. Old providers don’t cooperate with the new providers, he said. ”They delay it; push it to the last minute.”
Eventually, companies will realize they have to change if they want to remain competitive, he said.
“It is going to be a matter of time for some providers who have very abusive fee structures. Momentum will increase and clients will exodus,” Parks said.
“They will either lower their fees to be competitive, or their clients will leave them because of the fiduciary and legal responsibilities they have,” he added.
The Department of Labor has said it plans to increase its audits of plans moving forward, and several class-action lawsuits regarding excessive fees have been successful.
In a highly publicized move, a Yale University professor also stirred the pot earlier this year by sending out letters to companies he believes charge excessive fees.
Narkoff, echoing a common refrain, recommends plan sponsors work with a financial advisor when making any plan changes.
“I think the employers, small-business owners generally speaking, who are on their own, are not paying the same amount of attention as they are if they are working with an advisor that works in the space,” he said. “We see the financial advisor as being the person helping employers understand the different pricing models available.”
Not incidentally, as employers look to make changes in their retirement plans for next year, one of the features many are adding are auto enrollment and auto escalation. And while adding these features don’t cost anything directly, they can add cost to a plan, Narkoff said.
The additional costs come from higher recordkeeping fees because the number of covered employees increases when automatic enrollment is employed, and increased administration costs because it costs more to manage participants who have active account balances.
In any case, as employers get more assertive about reining in fees, the industry should expect to see more competitive bidding.
As the consultants at FiduciaryPath recently put it, a request for Information or Request for Proposal basically puts the different services – advisory, administration, record keeping, custody of assets, investment managers and perhaps more – “on notice to sharpen their pencils and provide their best bid to get the job providing the services.”
Edward Lynch, the founder and CEO of Fiduciary Plan Governance, said this approach is “so impactful” that he has seen plan costs drop by two-thirds in some cases.
And that, of course, leaves more money in participants’ retirement accounts.