The First Step is Understanding

September 11, 2008 ( - As plan sponsors prepare for new fee disclosure regulations, Spectrem Group has found they are more knowledgeable about plan fees than in the past.

According to a Spectrem Group study, the proportion of plan sponsors believing they pay no fees dropped to 9% from 23% in 2005. Likewise, the average estimated amount of fees paid to plan providers is 123 basis points this year compared to 107 bp in 2005, the study report said.

Among those who do pay, the largest proportion (37%) say they pay less than 1% of plan assets annually; 45% report paying between 1% and 2% of plan assets; and the remaining 8% pay more than 2% of plan assets.

Sponsors estimate that participants pay an average of 99 bp in fees to plan providers.The largest proportion (31%) say participants pay less than 0.5% of their account balances annually. As the possible amount paid by participants goes up, the percentage of sponsors selecting that amount decreases until only 6% say that participants pay more than 2% of their account balances annually.

On average, plan sponsors estimate they pay approximately 35 bp for the services of their advisers and consultants. Sponsors of the largest plans estimate their fees for advisory services at 46 bp.

However, only half of plan sponsors are confident they fully understand the fees charged by their advisers and consultants, and just 43% are confident they fully understand the fees charged by their plan providers. In addition, only half of plan sponsors are satisfied that they are receiving full value for the fees they pay for both advisors/consultants and plan providers.

Overall, 63% of plan sponsors say they are knowledgeable about payments made to affiliates and vendors of their plan provider in connection with the delivery of services to their plan. A similar pattern emerges when sponsors are asked if they are knowledgeable about allowances built into the fees they pay for the purpose of providing compensation to brokers or other intermediaries. The proportion of sponsors saying they are knowledgeable is higher among sponsors of larger plans.

Spectrem found that overall, 84% of sponsors receive a written fee disclosure statement from their plan providers and 88% receive one from their advisers and consultants. About half of all plan sponsors rely on their plan provider or the adviser who sold them the plan for any analysis of fees paid. One-third analyze fees using in-house staff and the remaining 17% use an outside consultant or a TPA.

In addition, the study report said outside advisers and consultants are used to assist in plan decisionmaking by about two-thirds of plan sponsors, with about half using a commission-based adviser or consultant and half using a fee-based adviser or consultant.Sponsors of plans where Human Resources leads the retirement plan decision process are more likely than other sponsors to use the analysis of the adviser who sold the firm the plan and less likely to conduct the analysis in-house.

Spectrem noted that the information provided to sponsors needs to be compared to that which will be required to comply with the new regulation that will go into effect on January 1, 2009.

The Spectrem Group study found that sponsors of plans with assets greater than $50 million are more likely than sponsors of smaller plans to use an outside consultant or TPA to assist them in analyzing plan fees. They are also less likely to rely on the plan provider.

In addition, these sponsors are considerably more likely than other sponsors to use an adviser or consultant that works on a fee basis. Commission based advisers are used most often by sponsors of smaller plans.

The lowest incidence of written disclosure is in plans with assets of less than $10 million and those where the lead responsibility for retirement plan decisions is shared among finance, HR, and other areas.

Sponsors of plans with $50 million or more in assets are the most confident about their understanding of fees (58%). Plan size does not appear to be an issue when it comes to the perception of many plan sponsors that they are receiving less than full value for the fees they pay.