Asset Mix:Preventing a Fee Backlash
What should a sponsor do if the plan has above-average fees?
“The first thing sponsors need to know is why. There are reasons certain plans
have higher costs—maybe a plan has really poor demographics, maybe it has very
low balances,” Itzoe says. “The second thing is to say, ‘What steps can we take
to reduce and restructure the fees? Can we get into lower share classes? Can we
utilize passive funds?’ Third, is there any way to pay some of the fees outside
of the plan [with the employer taking care of some plan fees]?” The last thing,
Itzoe says, is that if you cannot, or are not willing to, restructure the fees
or pick up some costs, it is important to figure out a very clear, well-crafted
explanation for participants.
For plans with an above-average plan fee, sponsors “need to demonstrate the
value that participants are paying for,” Reese says. “If they have something
that, compared to other plans, is above average or unique, explain that. They
just need to be very specific, highlighting the positives and the unique
Hoffman thinks plan sponsors’ fiduciary concerns, especially
education versus advice, will prevent many from offering too much detailed,
comparative fee information. “There is an issue with regard to where you draw
the line and what information is educational and what information potentially
constitutes investment advice,” he says.
Open for Discussion
Advisers such as Pensionmark have a solid idea of what
information sponsors can expect participants will want, beyond an initial
educational piece, because they have been proactive in approaching fee
disclosure and have made disclosures ahead of the legal requirements. Usually,
only a few participants call to discuss fees further, Duex says. “Probably only
1% or half of 1% of participants care, but for those who do care, it does not
matter how many memos you put in front of them; to get their questions
answered, they need to call someone,” she says.
Questions often relate to a couple of main areas. “A lot of
times it is, ‘I read something…’” Hammond says, adding that a participant may
have done online research about 401(k) fees. “People who read through that
[information] are generally trying to find some kind of benchmark on their
own,” he says. They may have come across an article mentioning a large plan’s
very low expense number but may not understand that plan fees can differ, based
on such factors as plan size, Duex says.
Participants also often need guidance through their own
statements and an explanation of specific fees, such as brokerage-window. “They
want you to walk them through the calculation,” Hammond says.