See this year’s 401(k) Buyer’s Guide.
Your employees may be forgiven if they see a devil behind every rock when it comes to the topic of 401(k) fees. These fees — usually associated with mutual funds, often hidden to the casual observer, and divvied up in mind-boggling ways — have been at the heart of many ERISA (Employee Retirement Income Security Act)-related lawsuits in the past several years. These include ones that Deere, Caterpillar, and Wal-Mart employees levied against their respective employers, alleging that their investment options were too pricey and riddled with conflicts of interest.
Add to that the Department of Labor’s multipronged efforts to improve fee disclosure from vendors and plan sponsors and a pending House of Representatives bill that would likely require more fee disclosure from sponsors to employees, and 401(k) fees may soon pose a devilish problem for employers as well.
Fee structures are complex, but by pushing vendors to specify who gets what out of precious plan assets, CFOs can gain valuable leverage. “Providers make money in different ways, and if you don’t ask the right questions you may not get the full answers,” says Pam Hess, director of retirement research at Hewitt Associates. “But it’s not as easy as it might seem for plan sponsors to ask the right questions,” which can vary by plan size and types of investments.
Many CFOs, though, maintain that fees are only one item in a complex equation. “Fees are one of seven core items on our checklist, but our decisions about which funds to use aren’t heavily weighted toward them,” says Steffan Tomlinson, CFO of Aruba Networks, which has a $15 million (approximately) 401(k) plan. Odyssey Logistics & Technology managed to shave 0.75% off participant fees for its approximately $5 million plan by moving to a larger service provider 18 months ago, says CFO Cosmo Alberico, but “we really didn’t look at it from a cost perspective. We looked at it [from the perspective of] ensuring that we came up with a plan that meets the needs of our growing company.” Alberico says that while he discussed revenue-sharing arrangements with the plan’s financial adviser, he “was focused on the total fees” versus how they were divided among various administrative and investment functions.
Indeed, there’s even an argument to be made that more disclosure may not be better. While plan sponsors should certainly consider the revenue-sharing arrangements that may exist between third-party administrators and mutual-fund investment managers, Hess notes that, “the total fees are what they are, and you wouldn’t want employees to decide they don’t want to be in an investment simply because of revenue-sharing.”
Given that more disclosure is likely to be required, however, there are several steps finance executives can take to make sure their plans are ahead of the legislation and not at risk for litigation.
Getting a Better Deal
First, there’s pure and simple negotiation. For companies willing to hire an adviser or devote internal manpower to the project, it is more possible than ever to push service providers to decouple administrative and management costs, and then use that data to negotiate better deals in both categories. A key factor: figuring out if the fee that an administrator takes for its work is reasonable, given the volume of assets and level of service.