Reevaluating how employees pay defined contribution plan fees


To help your employees improve their retirement savings, you plan to take a close look at your company’s defined contribution plan to make sure administrative fees are allocated equitably among participants. What can you do to get started?


In addition to reviewing the aggregate fees paid by the plan, plan sponsors should conduct a more detailed analysis to determine if certain employees are shouldering a larger percentage of fees than others, according to Winfield Evens, CFA, director of HRO Investment Solutions & Strategy at Aon Hewitt. More than half of plan sponsors rely on expense reimbursements from investment options to defray administrative costs. However, due to the wide range of payments provided by different asset managers and share classes, in many situations, the majority of plan costs are paid for by a minority of workers. Even participants with the same account balances often pay significantly different amounts for plan administration. Best-in-class employers are moving away from this approach, said Evens, and are designing their fee model so that an employee would pay the same amount in fees regardless of how their portfolio is allocated.

To appropriately and effectively manage total plan costs, Aon Hewitt recommends the following:

  • Assess overall plan expenses (including both investment and administrative fees) and determine how much each participant pays. Plan sponsors should understand and be able to explain why certain groups pay higher fees than others.
  • Leverage institutional vehicles and pricing where possible. Choosing low-cost institutional fund options is one way to cut fees for workers and ultimately lead to larger plan balances. For example, decreasing fees by 25 basis points per year (0.25 percent) can be equivalent to saving 0.75 percent more each year for a worker over the course of a 40-year career.
  • Distribute plan expenses across the plan population in an equitable manner.

    o For an asset-based approach, companies should select funds with a consistent level of expense reimbursement. Ideally, companies can select a set of funds without any reimbursement for administration included and, instead, deduct the fees needed to cover administrative expenses equitably across all fund options. This ensures that each participant is paying the same percentage of their account toward administration. According to Aon Hewitt research, 10 percent of employers charge administration fees specifically as a percentage of their account balance, while 25 percent add administration fees onto the fund's expense ratio.

    o For a per-participant approach — where all participants pay the same dollar amount toward administration regardless of plan balance or asset allocation — employers should use an investment lineup that does not provide expense reimbursements but, rather, applies a discrete fee to participant accounts on an ongoing basis (typically monthly or quarterly). According to Aon Hewitt, 26 percent of plan sponsors follow this approach in 2014, up from 11 percent in 2009.

  • Maintain a thorough and ongoing governance process to ensure that the plan's costs are in line with services being provided. Aon Hewitt's data shows that more than 82 percent of plan sponsors currently assess their total plan cost at least every year; the allocation of administration fees could be a natural extension of that process.

Source: Aon Hewitt Encourages Defined Contribution Plan Sponsors to Reevaluate How Workers Pay Fees, released June 4, 2014; Aon Hewitt, 4 Overlook Point, Lincolnshire, IL 60069; telephone: 847-295-5000.

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