The best way to get investors the lowest 401(k) fees possible is to automatically enroll as many of them as possible into big plans with high contribution rates, according to a study released last week on the economics of 401(k) and defined contribution retirement plans by Deloitte and the Investment Company Institute.
"Commitment by employers and employees is really key," said Sarah Holden, senior director of retirement and investor research at the ICI. "The study found that the plans tend to be lower cost when the participants' and employers' contribution rates are higher."
401(k) plans have been under criticism lately for their large drop in assets over the last year, but 401(k) champions argue that last year's crash in equities is to blame, not the 401(k) plans or the mutual funds they contain.
Still, the economy has hit the plans hard, and an increasing number of companies have halted their company match to these plans, further reducing their assets. Plans with more assets can offer lower fees, thanks to their greater economies of scale.
The ICI/Deloitte study released on Tuesday looked at more than 1,000 data points from each of the 130 plans studied last November and December. Researchers used this data to compare the range of fees with the size of the plans' total assets. In general, the larger the plan was, the lower the fees it had.
Prior to this study, the ICI had not been able to tell how fees varied by plan size, Holden said.
"The size of the plan is the primary driver of plan fees," said Daniel Rosshirt, a principal with Deloitte Consulting LLP.
Due to economies of scale, the average account balance and the number of participants had a direct relation to the average fee rate, he said, because larger plans can spread out fixed administrative costs -required to start up and run a plan and are driven by legal and regulatory requirements-over a larger group of participants and assets.
Rosshirt listed five secondary drivers to lower fees, including: higher contribution rates, a lower allocation of assets in equities and equity-oriented asset classes that are often more expensive to manage, a greater use of automatic enrollment, fewer plan sponsor locations and more service provider relationships, such as defined benefit plans, health and welfare, etc.
"The study also revealed a number of other factors that do not tend to drive fees for the companies studied," Rosshirt said. "These factors include the number of payrolls that a plan sponsor has, which might have increased complexity; whether plan services are provided by a mutual fund sponsor, life insurance company, bank or third party; the plan's tenure with the service provider; or the percentage of assets invested in proprietary investment products of the service."
Deloitte researchers used their data to calculate an "all-in" fee for each plan that captures the percentage of plan assets devoted to administrative and investment-related fees. Asset-based investment fees represent approximately 74% of the all-in fee (see chart).
The median fee for the 130 plans was 0.72% of assets, with a range of 0.35% in the 10th percentile to 1.72% of assets for plans in the 90th percentile. The median annual fee was $346 per participant, the study found.
"The median fee level found in the survey-72 basis points-aligns with previous ICI findings on fees of mutual funds used in 401(k) plans and demonstrates that competition in this vital market has kept fees low, even as plans offer higher levels of service," said ICI President and CEO Paul Schott Stevens.
The 130 plans surveyed ranged from fewer than $1 million assets under management to more than $500 million in assets, and ranged from plans with fewer than 100 participants to more than 10,000 participants.
Plans with fewer than $1 million in assets tended to have a fee range between 1.42% and 2.30%, while plans with more than $500 million had fees averaging between 0.14% and 0.61%, the study found. As expected, larger accounts pay a smaller percentage of fees.
"401(k) and other defined contribution plans play an important and growing role in Americans' retirement security," Stevens said. "Policymakers, employers, plan service providers and workers all need a better understanding of what plans cost and what factors are the key drivers of plan fees."
According to information from the Department of Labor, 62% of 401(k) plans have less than $1 million in assets and about 10% of active 401(k) participants are in these small plans.
Approximately 30% of 401(k) participants are in plans with more than $500 million in assets, and half of all 401(k) assets are in these large plans.
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