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Practice Management > Compensation and Fees

Disclosure rules help bring down 401(k) fees

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Whether it’s peer pressure or a desire to “do the right thing,” a year after the Department of Labor passed fee disclosure regulations for both defined contribution plan providers and plan sponsors, the industry’s fees are dropping.

Gone are the days when a plan could charge 2 percent or even 2.5 percent in fees. The average today is somewhere between 1 percent and 2 percent.

See also: Tips for deciphering DC plan fees

Chad Parks, founder and CEO of The Online 401(k), thinks fees should drop even farther. “It is egregious,” he said.

After years of talking about it, the DOL’s Employee Benefits Security Administration passed fee disclosure regulations last year as part of the Employee Retirement Income Security Act (ERISA). 

Some in the industry didn’t think the rules went far enough, particularly when it came to making fees understandable to defined contribution plan participants. The DOL came back and clarified that plan providers and sponsors have to provide a one-sheet summary of plan fees so that plan participants don’t have to wade through 40 pages of dense text searching for them.

Related story: Mandated DC fee disclosure has little positive impact

In the past, companies like Vanguard and The Principal didn’t have to disclose their recordkeeping fees. Now they must separate those fees out from other fee disclosures and provide detail on indirect compensation, like revenue sharing and compensation to advisors, attorneys and trusts that comes out of plan assets.

When the fees were first proposed, the hope was that once everyone disclosed their fees it would be much easier for people and plans to benchmark their plan’s fees. Many studies were done before fee disclosure rules came out that revealed that most people didn’t even know they were paying fees on their retirement savings.

Participant disclosures went out this past November and, despite all of the media hype, barely 1 percent of participants called to complain about their fees. That could change moving forward, said Parks. Participants haven’t had a full year to mull over their plan expenses and the more they hear about fee disclosure, the more likely they are to question their own plan’s fees in the future, he said.

Stuart Robertson, president of Sharebuilder 401k, a company that provides 401(k) plans for small and mid-size businesses, agrees that nobody should be charging over 1 percent in fees and believes that, given time, that will happen.

“Our stance is everyone should be under 1 percent. If you are starting a plan, you should be well under 1 percent. The bigger you are, the lower you should be able to negotiate,” he said.

Most small plans are paying between 1.5 and 2 percent in fees and mid-market plans are paying between 1 and 1.5 percent, Robertson said.

According to the 13th edition of the 401k Averages Book, small plan costs fell from 1.47 percent to 1.46 percent in 2012, while large plan costs fell from 1.08 percent to 1.03 percent. Expenses for small plans were between 0.38 percent and 1.97 percent, while large plan expenses ranged from 0.28 percent to 1.41 percent.

The book, which has been published since 1995, also found that asset-based fees, including investment management fees, fund expense ratios, 12b-1 fees, wrap and advisor fees also fell last year.

Sharebuilder recently launched an online cost comparison tool that any company can use to compare its plan fees against a plan that charges less than 1 percent in fees to see how those costs add up over a 5-year time frame.

“Companies can do it themselves with their fee disclosure document, and if they find their provider’s document hard to decipher, they can upload it and we will do it for them,” Robertson said.

More than 200 companies have taken advantage of Sharebuilder’s cost comparison tool so far and “that definitely is helping our business, without question,” he said.

Sharebuilder 401k prides itself on its transparency. It posts its prices on its website and modeled its disclosures after the DOL’s example during the first round of fee disclosure rules so they would be clear and simple to read, Robertson said.

All of the media attention and education that has gone on in the past year is “creating pressure on the marketplace to put in a better solution for employees to save them money,” Robertson said. “Hopefully we are part of that for a lot of people.”

Robertson added that Sharebuilder is getting more interest from upper small and mid-market plans because of fees. That said, it can take 10 months to a year before a plan will “pull the trigger” and switch retirement plan providers.

“It can be a pretty long sales cycle to move forward with this, especially if it is a sizable plan,” he said.

Regardless, fee disclosure has started impacting the mutual fund and hedge fund industry as well, according to Steve Blumenthal, founder and CEO of CMG Capital Management Group of King of Prussia, Pa.

“In the past, a lot of the funds didn’t report their fees and weren’t required to report subcontractor fees that flow through at the hedge fund level.  They would see a return stream and wouldn’t report the fee in their mutual fund fee, he said. “We’re seeing more and more people reflect the total fees, which is the right thing to do.”

Anton Bayer, CEO of Up Capital Management, believes that some of the reduced fees have gone too far. He pointed out that financial advisors now make a scant 10 to 20 basis points, but they still shoulder a lot of the fiduciary responsibility for the plans they work for.

“Now they are making so little money, the question is whether it is in the best interest of a plan to have advisors who play a key role in the plan and in educating participants be so little vested in the plan. Is it an improvement?” he asked.

Bayer, who has been a financial advisor for 32 years, said he moved from charging commissions to becoming a fee-based registered investment advisor because it made sense in this new environment.

The good part about charging a fee up front is that investors can decide if the fees you are charging are fair or not, he said.

And even though he is concerned that low fees will take precedence over quality of services offered, Bayer is glad the fee disclosure rules got the conversation started.


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