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.
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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.
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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.