DC plans cutting costs using 'big stick' of fee disclosure

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Seeing: Lori Lucas said record keepers got more competitive after realizing fee disclosure was coming.

New federal fee-disclosure regulations have enabled defined contribution plan executives to cut costs in multiple ways, ranging from negotiating lower fees for existing investment options to bargaining for less expensive institutional shares as well as collective trusts, consultants say.

The heightened confidence among plan executives to negotiate better terms with record keepers also has led to plans reducing their reliance on complex revenue sharing and adjusting their arrangements to rebate money to participants or receive additional services from record keepers.

“The record-keeping pricing game has changed in several ways” thanks to the regulations, said Ross Bremen, a partner with Cambridge, Mass.-based investment consulting firm NEPC LLC.

“Fee-disclosure regulations have had an influence,” said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan Associates Inc. “We started to see this movement by sponsors in anticipation of the rules. The record keepers pretty much saw the writing on the wall and decided to be competitive.”

Consultants say the unusually long run-up to the Labor Department's final approval of regulations contributed to the changes because record keepers knew something would happen — even if they didn't know exactly what or when. The department originally proposed changes to Section 408(b)(2) of the Employee Retirement Income Security Act in December 2007. The final rules were published last February and took effect in July.

Some surveys show sponsors' attitudes and actions changed as fee-disclosure regulations were debated and enacted. For example:

  • A soon to be released survey by Aon Hewitt, Lincolnshire, Ill., using data from 2012 found multiple instances of sponsors saying they are likely to take fee-cutting action in 2013 vs. 2012. Among plan executives who hadn't already acted, 52% said they were very likely or somewhat likely to hire a third party to benchmark or analyze fees, compared to 35% in the previous survey. And 30% said they would likely change some or all funds to lower-fee share classes vs. 24% in the previous survey.
  • A recent survey by NEPC said that median DC plan costs of 55 basis points for the 15 months ended March 31, were the lowest since the financial consulting firm began its annual survey in 2006. About 10% of plans in the latest survey conducted vendor searches in 2011, producing an average 40% savings on record-keeping fees.
  • The annual survey by the Plan Sponsor Council of America, published in October, noted 53.7% of plan executives said they used third-party fee benchmarks vs. 48.7% in PSCA's previous study.

Catalyst for a better deal

Consultants say a fee benchmarking study is often the catalyst for DC plans to get a better deal.

“Most of our clients are happy with their record keeper, and they don't want to go through an RFP,” said Bill McClain, a Seattle-based principal and consultant for Mercer. “When we do the benchmarking for clients, we say here is what you're paying and here is what the market will pay. When we have that information, the record keepers are willing to negotiate. The record-keeping marketplace has gotten more competitive.”

He cited one example of DC-plan bargaining in which a 401(k) plan with $1.3 billion in assets negotiated a 30% cut in annual administrative expenses following a fee-benchmarking study. Although total plan costs were “reasonable,” the study benchmarked administrative fees separately from the investment fees, revealing “the plan's administrative fees were higher than what other providers would charge to administer the plan,” he said.

Mr. McClain, like all others interviewed for this article, declined to identify sponsors or record keepers.

Callan Associates' Ms. Lucas cited one example of a plan with more than $1 billion in assets that, after conducting a fee benchmarking study, decided it wanted to eliminate revenue sharing. “Regardless of performance, they wanted a mutual fund (subject to) revenue sharing removed” from the investment lineup, she said. “So they negotiated a collective trust with the investment manager. They had clout.”

Ms. Lucas, Mr. McClain and other consultants said they have noticed DC plans are trying to cut or eliminate their reliance on revenue sharing, in which all or most of a record keeper's costs are offset by a plan's investments.

Some plans are revising their fee arrangements with providers to make the system more fair among participants or to secure additional services for the same price.

According to the upcoming Aon Hewitt survey, 26% of DC executives said they were likely to restructure their administrative fees “to be assessed to participants in a more equitable manner” compared with 18% in the firm's previous survey.

And the PSCA survey reported that 22.5% of DC executives said their plans used ERISA expense budget accounts — also known as plan expense reimbursement accounts or recapture accounts — compared with 17.9% in the previous year's survey. These accounts are repositories for record-keeping revenue that has exceeded the level negotiated between the record keeper and sponsor.

“We've seen sponsors put some of the unused ERISA budget back to the participants,” said Toni Brown, director of U.S. client consulting and head of defined contribution for Mercer Investments in San Francisco. She said the fee-disclosure regulations have placed a spotlight on revenue-sharing agreements, providing “more attention to what they are and how they are handled.”

Ms. Lucas cited an example in which a client with $500 million in DC assets asked its record keeper to create an ERISA account to handle excess record-keeping payments. Although the overall fees didn't decline, the record keeper increased its services, primarily in employee communication, she said.

Mr. Bremen said the fee-disclosure rules enabled one NEPC client to reduce its revenue-sharing hurdle — the agreed-upon amount between sponsor and record keeper — by 25%. Lowering the hurdle allowed the plan to provide cheaper share classes, he said. Additional revenue above the hurdle goes into an ERISA expense budget account to pay other qualified plan expenses.

Lower fees

The DOL fee-disclosure regulations have enabled Towers Watson & Co.'s DC plan clients to also negotiate lower fees and additional services, said Robyn Credico, the firm's Arlington, Va.-based defined contribution practice leader.

For example, a plan with $4.6 billion in assets was able to cut its annual fees by 26%, while increasing its budgets for communication and participant education and securing “enhancements to reporting and technology,” she said. A plan with $363 million in assets was able to negotiate a 58% drop in annual fees while also securing “improvements in compliance and communications support services,” she added.

There has been an “uptick” in client requests for fee benchmarking studies in the periods prior to and since the DOL's publishing of fee-disclosure rules, Ms. Credico said.

This article originally appeared in the January 7, 2013 print issue as, "DC plans cutting costs using "big stick' of fee disclosure".