Raiding the Returns

Hidden costs and high fees eat into 401(k) plan benefits.

In some cases, plan sponsors have turned to consultants to act as intermediaries with funds.

One such consultant, Brent Glading of Montclair, New Jersey­based Glading Group, says that by analyzing a 401(k) plan and negotiating with the provider, his firm can “recapture the excessive profits from the [fund] administrator, and generate them back to the plan participants.” In just over a year of operation, he says, about 20 private-and public-sector sponsors have used the firm’s services. In the extreme case of one client, with an average participant balance of $100,000, Glading says he was able to shave 30 basis points by identifying excessive revenue sharing between the investment manager and the recordkeeper. He negotiated an annual return to the plan’s 650 participants of about $460 each, for a total savings of $330,000. “This is a gross example,” he says, “but it certainly is a return that can happen.”

The idea at Barrington, Illinois-based Clark Consulting is to “first conduct a fiduciary assessment that includes an analysis of its client’s plan expense components” where excess costs are identified, says Harold Small, vice president for Clark’s human-capital practice, based in Atlanta. Then, Clark shows them “how much of their investment dollar is really going into the management process.” In a typical plan with assets of $500 million, he says, total reductions of 5 to 15 basis points are not unusual. Five points on a $500 million plan equals $250,000 a year.

Jackson of Cedar Fair, which spent two years as a Clark client, is happy with the lower fees his company won, although reductions vary from fund to fund in his plan, and he hasn’t calculated the total savings. “It’s a meaningful amount,” he says. One low-cost stock-index fund even had its fee shaved by 10 basis points, according to Jackson.

“In some respects, it helps to have an outside adviser,” he adds. “It can be the tough guy to get mutual funds to listen to you.”

Of course, many finance executives tend to pay much more attention to returns than to fees in choosing a mutual fund for their company’s 401(k) plan. When Putnam Investments recently announced it was cutting fees voluntarily, treasurer Alan Hartley of Shari’s Management Corp., a Beaverton, Oregon, restaurant operator, says he hardly noticed. “I didn’t think their fees were that high, and the returns are very good” on the single Putnam fund Shari’s has in its plan.

To counter any apathy, Harold Small says Clark Consulting subjects its 65 corporate and other clients to the pitch “that the plan sponsor has a responsibility not only to pick good investment options, but to pick efficient ones.” And they must also ask, “Is what we’re spending appropriate for a plan that size?”

With plan sponsors bearing the fiduciary responsibility for participants, Senator Fitzgerald says such questioning is a crucial legal strategy as well. “Plan sponsors that are interested in being protected from lawsuits ought to make it their business to carefully investigate the fees for their funds,” he says.

Roy Harris is senior editor at CFO.

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