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Pension and Employee Benefits: Code, ERISA, & Regulations
This series provides an authoritative and comprehensive reference to the full text of benefits-related provisions of the Internal Revenue Code, the full text of ERISA, and related proposed and final regulations, as well as the official IRS and DOL preambles, and Committee Reports.
from Spencer’s Benefits Reports: The median fee covering administration, recordkeeping, and investment services was $346 per year for the 130 defined contribution plans surveyed by Deloitte and the Investment Company Institute in late 2008. As a percentage of plan assets, the annual median fee was 0.72%, with 10% of the plans reporting fees of 0.35% of assets or less and 10% of the plans reporting fees of 1.72% of assets or greater.
“Fees of 401(k) plans vary greatly due to unique plan characteristics, plan/investment design, range and quality of services provided, and pricing strategies employed by retirement providers,” said the study, entitled Defined Contribution/401(k) Fee Study in 2008. “As such, there are a large number of variables impacting the fees that plans and participants pay.”
In order to permit a direct comparison of fees among plans, the study developed an “all-in” fee that includes fees for investment management; administration, recordkeeping, communication and education; financial advice to participants; and plan sponsor investment consulting. Fees incurred by individual participant activity for things such as plan loans were not included. Investment management fees made up the largest segment (74%), followed by recordkeeping/administrative fees (23%). The study found that plan participants pay 83% of the total plan fees, while employers cover 13% and the plans pay the remaining 4%. (The study noted that other surveys have found that forfeitures are used to pay the percentage taken care of by the plan.)
The primary driver of fees was the size of the plan, specifically the number of participants and the average account balances. As these two figures rose, the fees as a percentage of plan assets tend to fall. For example, “while the median plan’s ‘all-in’ fee was 0.72% of assets, the median fee among plans with less than $1 million in assets was 1.89% of plan assets and for plans with more than $500 million in assets, the median ‘all-in’ fee was less than 0.50%.” The “all-in” median fee drops below 1% of assets once a plan reaches $10 million in total assets, or 1,000 participants.
Secondary drivers of fees include participant and employer contribution rates (the higher the participant contribution rates, the lower the fees); plan asset allocation (the higher the concentration in equities, the higher the fees); the retirement service provider relationship (less than three years with a provider results in higher fees); and plan design (plans with automatic enrollment appear to have lower fees).
The type of retirement service provider (mutual fund, insurance company, bank, or third party administrator) was not identified as a fee driver by the study. However, the study found that “a provider’s focus and specialization in a particular market (e.g., small or large) is a better indicator of fee levels than solely those providers with the largest number of participants on their recordkeeping system.” The study also found that plan sponsors that have multiple relationships with their service provider have lower defined contribution/401(k) plan fees as a percentage of assets.
The study found that recordkeeping services to the 130 plans were delivered by 31 different retirement service providers. Mutual funds provided services to 53% of the plans, followed by banks (19%), insurance companies (18%), and TPAs (11%). The average length of time that a plan stayed with a service provider was eight years. Of the plans in which proprietary investments were offered through their service provider, 95% of the plans had a mix of proprietary and nonproprietary investments; while only 5% of the plans used exclusively proprietary investment options.
For more informaiton, visit http://www.ici.org.
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