And you thought the baseball contract negotiations were tough.
Plan sponsors are forcing their 401(k) providers to hustle more than ever, asking them to cut costs, disclose fee structures and improve service.
Because CitiStreet of Quincy, Mass., the current administrator of Office Depot's $145 million plan, has "almost doubled" its fees, Office Depot is looking for a replacement.
"They've explained to us that because they have an asset-based fee structure, they aren't getting enough fees," said Charles Patton, vice president of compensation at Office Depot. "Well, while the market was going gangbusters, they certainly didn't turn to us and say, We collected too much money. We're going to reduce your fees.'"
Sponsors are taking a harder look at how much they're paying and what kind of service they're getting from 401(k) money managers, administrators and recordkeepers, according to recent reports in MFMN sister publication Employee Benefit News. Not only are they looking for such hot 401(k) features as abbreviated blackout periods but they are particularly interested in hidden fees. Paying 10 basis points for a money management firm's investment research here and 50 basis points to a plan auditor there, adds up, said Al Otto, president of defined contribution (DC) consultancy Whitehorse Advisors of Atlanta.
"We definitely have seen an increased sophistication on the part of the human resource departments," said William Arnone, a partner with Ernst & Young's personal financial counseling practice in New York. "Treasurers and CFOs have started to see how much is at stake."
However, because there are at least 100 ways to structure a plan's cost and 401(k) plan providers' prices are so "highly subjective, discovering the true cost of plan expenses is understandably no easy task," Otto said. One investment-management firm may charge a sponsor a 250 basis-point wrap fee, while another may reduce its recordkeeping or trust services by sharing revenues with these contractors. Some vendors amortize the full cost of technology into their pricing model, while others absorb it. All this creates large pricing differences.
Money management, consulting, legal and audit, technology, distribution, investor education and/or advice and recordkeeping - these are just a few of the various pieces of the 401(k) sponsor puzzle.
"Pricing strategies absolutely do not mirror actual costs," Otto said.
It is, in fact, "fairly difficult" to evaluate 401(k) providers, agreed Ed Lehman, a senior consultant with Watson Wyatt of Washington. So complex is the picture that total costs can vary by as much as 300%, according to The 401(k) Averages Book, published by HR Investment Consultants of Baltimore.
Whereas plan sponsors were once overwhelmed by the daunting task of figuring out the true cost of their 401(k) plans and tolerated poorly priced or serviced plans, many are now improving their knowledge. The sharpest ones know that the extra charges in 401(k) plans line fund companies' and administrators pockets with billions of dollars a year.
Revenue-sharing, which is estimated to finance 60% to 90% of a plan's expense, is a poorly disclosed and relatively unregulated arrangement that falls between the cracks of the Department of Labor (DOL) and Securities and Exchange Commission oversight, according to a 2001 report from McHenry Consulting of Berkeley, Calif.
McHenry estimates that revenue-sharing funnels $1 billion to $1.5 billion of investor assets to 401(k) service providers each year, which can make the difference between profit and loss for the recordkeeping and administration of retirement plans.
Sponsors are waking up to how serious the ramifications of these fees can be for investors. For a 45-year-old participant with an account balance of $250,000, the reduction of a mere 50 basis points traced to excess asset charges could add $145,800 to their account balance over 20 years based on a 10% return.
By the same token, however, the get-what-you-pay-for axiom is sometimes inescapable. Some sponsors are willing to pay slightly higher fees for higher-quality money managers, who they hope will produce significantly greater retirement income for their participants.
Still, any road to quality assurance and improved value requires careful cost analysis.
Even if a sponsor or its consultant can't figure out these costs themselves, some are finding that investment firms and their partners will gladly improve their fee disclosure and tweak service contracts to keep them from taking their business elsewhere. In fact, many sponsors are now demanding full disclosure and documentation of all plan fees, and some are getting tougher on fee negotiations.
Large plans are also throwing their large asset sizes around, with much success, according to Bob Liberto, vice president at Segal Co. of New York, an employee benefits and actuarial consulting firm. "In a large market, the plan structures are custom-made, and there are no fees associated with them," Liberto said.
"In a small plan, [sponsors] have to pay for all these services, and [they] have a limited number of options," Liberto said. "But when companies get to about a $20,000 average account balance, they should start negotiating."
What is more, larger plans have greater flexibility in the types of funds, share classes and fees they can request, said Wayne Bogosian, president of the Personal Finance Education Group of Boston and author of The Complete Idiot's Guide to 401(k) Plans. For instance, a large plan might be able to mix less-expensive institutional share classes, whereas a smaller plan must rely on retail share classes.
A larger plan may also be able to ask for a contractual performance guarantee that lays out certain standards of quality and penalties, usually financial, that will be imposed if they are not met, said Mark Rucci, SVP with claims and insurance consulting firm Niis-Apex of Salem, Mass.
Rising from the Torpor
Plan Sponsor magazine's 2001 DC plan survey proves that many plan sponsors are beginning to ask harder questions of their 401(k) providers. Although only 17.4% of plan sponsors left their investment management or administrative firm because of high fees or better deals from competitors, far more plan sponsors (26.6%) left their vendor because of poor service or lack of product features.
The smart thing for 401(k) plan providers to do, Segal's Liberto said, is to be totally up front with a plan sponsor about their choice of features and prices, and slot sponsors into a product that honestly suits their needs.