Reducing 401(k) Costs in a Buyer's Market

As 401(k)s become the primary retirement savings vehiclefor more and more workers, the need to keep plan costs from cutting into investment returns intensifies. And in today's competitive market, plan sponsors may be in a better position to do just that than they have been for a while.

The stakes are high. The Profit Sharing/401(k) Council of America reports that 420,000 401(k) plans are in place, with more than 44 million participants and $2 trillion in assets.

While the cost of a 401(k) plan to an employer is, on average, half that of a defined-benefit pension plan, 401(k)s entail substantial expenses. More than half of the plans surveyed by Hewitt Associates have an annual total plan cost (TPC) of between 0.31 percent and 0.70 percent of plan assets. The median TPC is 0.59 percent, and the average is 0.62 percent. To make a dent in TPC, the finance function must identify total plan costs, structure the plan to control those outlays, create a paper trail to satisfy Labor Department requirements, evaluate fee disclosure and make appropriate cost projections. It's not an easy job, given the relative obscurity of total plan costs and the unwillingness of many vendors to clarify expenses.

"Companies are more concerned about monitoring all of their 401(k) plan costs than they were 10 or even five years ago," says Michael Weddell, retirement consultant at Washington, D.C.-based Watson Wyatt Worldwide. "Now if a provider promises a $0 per participant fee, that marks just the beginning of the discussion. Companies strive to measure total costs including investment fund costs and other administrative charges. As the 401(k) plan becomes the primary retirement plan for an increasing number of employers, those employers realize that they need to keep plan costs down for those plans to generate as much retirement savings as possible."

New interest in total plan costs also derives from the renewed focus on compliance with fiduciary requirements under the Employee Retirement Income Security Act (ERISA), according to Paul Bracaglia, a partner in PricewaterhouseCoopers LLP's investment advisory group in Phil-adelphia. "Part of the ERISA requirements entail ensuring that the costs associated with the plan are fair and reasonable and understanding that the retirement plan committee is obligated to act in the best interest of plan participants," he says.

"At the same time, the competitive environment among 401(k) plan providers is continuing to heat up," Bracaglia points out. "The growth in the number of new plans being introduced has slowed considerably, so the only way for a provider to grow market share is to win existing business from their competitors. With this as a backdrop, astute retirement plans are using this buyer's market to look for opportunities to reduce their plan costs."