Comparing 401(k) Fees in the Age of Disclosure

The U.S. Department of Labor's 401(k) fee disclosures requirements took hold on November 1st with the DOL providing a 120-day transition period to help 401(k) plan sponsors to prepare to comply. During that transition period, plan sponsors need to assemble the required information, but they should also consider the implications of disclosure. Once companies start disclosing fees paid, they need to be confident that those fees are competitive relative to what others are paying.

Given this change, it is a good idea for plan sponsors to get a handle on their total plan fees and how those fees compare to the fees paid by other plans. If their plan's fees are skewing higher than most, CFOs and plan fiduciaries to find ways to bring those fees in line or justify why their fees are higher than the median.

A just-released study of 525 plan sponsors conducted by Deloitte and the Investment Company Institute from January to August helps to answer this comparative fee question. To allow for easier comparisons between plans, the study looks at fees charged to a 401(k) plan for administration/recordkeeping, investment management and other specialized professional services, such as investment consultants and financial advice for participants, as a single “all-in” fee.

The study found that the median participant-weighted “all-in” fee for plans was 0.78 percent of plan assets or approximately $248 per participant. These figures are slightly lower than the 0.86 percent reported in the 2009 study. At the two extremes, the best performing plans in 2011 ranked in the 10th percentile paid fees equal to 0.28 percent of plan assets, while the poorest performing plans ranked in the 90th percentile had fees equal to 1.38 percent of plan assets.

Perhaps more importantly, the study identified the key drivers of 401(k) plan costs. Not surprisingly, overall plan size in terms of number of participants and average account balances were two primary drivers of plan fees. Plans with more participants and larger average account balances tend to have lower fees as measured as a percentage of plan assets. This is not necessarily surprising because 401(k) plans come with certain fixed administrative costs that cannot be avoided, such as recordkeeping and compliance. Larger plans with more participants and higher account balances can spread these fees out over a larger population and asset base, so service providers can afford to charge fees that represent a lower percentage of assets.

However, the study found one other primary driver of plan fees—the percentage of assets invested in equity investment options. Equity investment options tend to have higher fee ratios than other types of investments. The study found that a ten-percentage-point increase in the percentage of assets invested in equity investment options adds 2.6 basis points to plan fees.

Finally, the study identified certain secondary drivers of plan fees. Plans with a higher overall contribution rate, fewer investment options and automatic plan enrollment tend to have slightly lower plan fees than their peers.

The full study report is available for free download here.