One of the biggest disconnects in the business, say experts, is that fees are typically based on the volume of assets, meaning that participants pay more as their accounts grow. Since there’s not necessarily a commensurate increase in the work associated with servicing larger accounts, “you should ask if there are other options for structuring fees,” says Hess, including the possibility of a flat per-head fee.
The easiest way for a small plan to lower its fees is to try to get into a better share class of a mutual fund, moving from retail-priced shares to institutionally priced shares, says Donald Stone, president of Plan Sponsor Advisors, a 401(k) plan consultancy that claims it has helped clients reduce fees by up to 40% in the past year.
For maximum negotiating leverage, Stone recommends pressing the administrator to disclose how much money it needs to turn a profit on the account; lock in a rate based on that figure as you simultaneously try to shave costs in other areas. “Vendors resist, but they will do it this way,” says Stone. (Very useful to this effort, Stone notes, is the benchmarking data his firm and others can provide.)
Another way for small or midsize plans to shave some fees is to consider a move from actively managed mutual funds to passively managed ones, which typically mimic a standard market index, like the S&P 500, and carry lower fees. That is the next phase that Alberico is considering, cautiously, since the verdict on which one performs better is constantly subject to change. In particular, Stone cautions that it is important to probe the risks inherent in “how [the fund] is replicating the index.” He notes that the move doesn’t always lower costs, particularly compared with some institutionally priced shares of actively managed funds.
Finance executives at fast-growing companies should also be on the lookout for when they might be ready for a broader — and cheaper — service arrangement. At Watkins Insurance Group, “we started our plan maybe eight years ago, when the company was under 20 people, and now we’ve grown to closer to 100,” says Lee Rabbitt, benefits manager for the eight-office, central Texas insurance agency. The company switched recordkeepers and added an independent financial advisory firm, slashing its total costs by 30% to 40%, Rabbitt estimates, and “now we know exactly what we’re paying.”
Once a plan’s assets exceed $100 million or so, an even more appealing option may open up: the possibility of moving away from mutual funds into similar yet lower-cost vehicles. The most popular alternative structure at the moment is known as a collective trust, or commingled funds, in which a bank combines retirement-fund assets from several employers into a trust that generally aims to mimic a given mutual-fund strategy.
Long popular with pension funds, collective trusts have taken off in the defined-contribution world since the Pension Protection Act of 2006 blessed them as qualified default investment alternatives, notes Steve Deutsch, director of collective trusts at Morningstar, which rates many of the trusts based on information voluntarily supplied by their managers. Morningstar estimates that more than $1 trillion of retirement plan assets are flowing into such vehicles right now, with some 45% of 401(k) plans already using them, according to Greenwich Associates, many for target-date fund options.