DC Recordkeeping: The High Cost of Low Fees

Sponsors of defined contribution (DC) retirement plans have been on a multi-year mission to reduce costs, both in fees for investment management and plan administration. And with apparent success: For recordkeeping in particular, surveys report that pressure from sponsors and advisers, as well as competition in the market, have reduced per-participant costs by about half, in dollar terms, over the last dozen years.

But sponsors need to look beyond the published fee rates, as recordkeepers take measures to subsidize lower recordkeeping fees through investment products and other indirect routes. They also need to be alert to reduced levels of service, as recordkeepers automate and offshore their operations.

PLANSPONSOR met with Ted Schmelzle, Senior Director of Plan Sponsor Services, and Kent Peterson, Chief Financial Officer, both of Securian Financial Retirement Solutions, to discuss the evolution of the recordkeeping marketplace, and the questions sponsors and their advisers need to ask for a full measure of the quality and cost of services their recordkeepers are providing.

PLANSPONSOR: For years there have been moves to cut costs from all variables in the DC equation. Has the total effective cost really gone down that much, and what has been the benefit to sponsors and participants?

Kent Peterson: It’s hard to find a place where there isn’t fee compression in the retirement space—with asset managers, recordkeepers, and the advisers that support plans. Sponsors have been looking to pay lower fees, and providers have promised that they would deliver the same service at a lower price point. In many instances that helped to wring a lot of inefficiencies from recordkeeping.

But that may have run its course. In the conversations we have with sponsors and advisers, of course they think it’s great to have lower fees, but there’s also significant frustration with deterioration in service. That means sponsors and advisers have to work harder to make up for the reduced service, and in the end it’s just shifting the costs, rather than creating a true net saving. We’ve just published a white paper, Fee compression isn’t free, that discusses the challenges, and suggests a list of questions for advisers and sponsors to aid in their due diligence: www.securian.com/FeeCompression.

Ted Schmelzle: In some cases, those cost savings morphed from compression of fees into subsidization, where recordkeepers are using ancillary revenue streams to make up for loss-leaders services in plan administration.

PS: The structure of DC plan services is awfully complex—how can sponsors get a reasonably accurate view of the true cost they are paying, and what it is they are paying for?

Schmelzle: Let’s start with the requirements placed on sponsors under ERISA. They have to look at what they spend, and make a determination that the cost is reasonable relative to the services provided. If the recordkeeper is subsidizing the cost of those services with some other revenue, it can be impossible for the sponsor to know the true cost of what they’re getting.

Peterson: Sponsors need to know what they are explicitly paying, but they also need to know of any conflicts of interest for the service provider. Unfortunately the subsidies can take many forms. The provider can be guiding sponsors to use their stable value funds, or adopt their in-house target date fund series, which may not be the best values. Revenue sharing through 12(b)-1 fees is still prevalent, too. More recently, a few recordkeepers have established so-called pay-to-play platforms, where they charge a fee to mutual fund companies to be part of a select list of investment options they offer to sponsors. And the smaller the plan, the more likely it is that sponsors are being talked into one of these more rigid investments that the recordkeeper claims are low cost, but in fact only appear to be, because they are hiding the true cost in some other element.

Beyond that, some providers aggressively mine data on participants leaving a company, to drive them to their IRA products. That’s a captive audience that can be easy to persuade. If a provider’s recordkeeping is relying on fees from IRA rollovers, then it’s not self-sustaining, and that has implications both for the plan participants and the people that buy the IRAs. If the recordkeeping services are priced too low, that means recordkeeping expenses are being embedded in the cost of the IRAs. That’s important to know, because a plan sponsor owes the same fiduciary duty to every participant—whether they’re active employees with assets in the plan, or people that have left the company and taken their assets with them. The Department of Labor says that it’s a sponsor’s duty to protect against any service that is priced too high.

PS: You mentioned that sponsors and advisers have been forced to make up for reduced service levels. How does that come about?

Schmelzle: Recordkeepers are calling their services more efficient, or streamlined, but that may be a kind way of saying “less service.” For the sponsors, the recordkeeper may not have dedicated account or relationship managers they can call and talk to. Another point is the intake of participant data, and the effort to ensure it’s suitable—does the recordkeeper just load it in their system as is, or do they work with the sponsor to ensure it’s as good as can be? That point might seem like it’s in the weeds, but everything depends on clean data.

For the participants, straight-through processing may be efficient, but does it take out all the human interaction, and lose some of the important protections on the security side? Does the recordkeeper have customer service representatives that have sufficient experience and acumen, and are dedicated to retirement plans? Let’s face it—we’re in a business where the details matter.

All this can mean extra work for the sponsor’s staff, which eats up the savings in the recordkeeping fees. Very large plans already have HR and legal teams dedicated to these kinds of things, but in many instances this most acutely affects smaller sponsors that can least afford it. They’re looking for the administrator to take work off their plates, only to find that it’s coming right back to them.

Peterson: In view of the burden that lower quality service can place on sponsors, the recordkeeping service with the lowest cost may not be the most prudent choice.

PS: What other strategies can help sponsors lower their plan costs?

Schmelzle: Thinking of plans overall, encouraging retiring employees to leave their assets in the plan can be helpful in lowering costs, and at the same time providing better retirement outcomes. In many instances that’s a win for everyone. The participants win, because they get institutional pricing on their investments, and flexibility in choosing what investment and income products they need. The sponsors win, because they can achieve greater scale and buying power. The recordkeeper wins too, whether they base their fees on assets or participant count.

Peterson: Just one more thought to emphasize—understanding the whole recordkeeping picture can call for a lot of extra research for plan sponsors and their advisers, and they may have to dig to discover any possible subsidies, conflicts, and imbalances built into recordkeepers’ business models. But plan sponsors deserve, and need, to know exactly what they are paying, and the true cost of that service.

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Securian Financial has been offering consultative retirement plan solutions to help employees achieve retirement readiness since 1930. Our innovative, fiduciary-friendly approach includes lowest cost share classes, extensive administrative outsourcing and exceptional service provided by long-tenured retirement plan specialists. Bundled and unbundled service platforms are available to clients of all sizes.

These materials are for informational and educational purposes only and are not designed, or intended, to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. Securian Financial Group, and its affiliates, have a financial interest in the sale of its products.

Securian Financial’s qualified retirement plan products are offered through a group variable annuity contract issued by Minnesota Life Insurance Company.

Securian Financial is the marketing name for Securian Financial Group, Inc., and its affiliates. Minnesota Life Insurance Company is an affiliate of Securian Financial Group, Inc.

DOFU: 9-2019

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