Most 401(k) plan sponsors believe their fees are competitive, but what they're paying is a mystery to many, according to the Pensions & Investments/Deloitte & Touche 2001 survey.
Less than half of the plan sponsors responding didn't know their plan's average fund expense ratio, and more than a quarter did not know their plan's total annual administrative fees, excluding investment expenses.
The first joint P&I/Deloitte & Touche survey obtained responses from 574 sponsors with an average plan size of $320 million. Human resource departments most frequently - 56% of respondents - have responsibility for the plans, while 35% reported joint responsibility between human resources and the finance department. Only 9% reported finance had sole responsibility.
Forty-eight percent of respondents didn't know their plan's average fund expense ratio, and only 52% knew their plan's average annual investment management fees. Twenty-seven percent of respondents didn't know the plan's total annual administrative fees.
Only 26% of respondents have contracts that allow the provider's fee to be reduced if certain requirements aren't met. This compares with 60% without such contracts and 15% who didn't know if they had such a requirement.
Yet plan sponsors appeared fairly satisfied with their grasp of plan fees. Eighty-four percent indicated they "have a clear understanding of the total plan/participant fees being charged," and 78% said they have a clear understanding of normal operating expenses of the funds in their plans. Eighty-four percent of responding employers indicated they believe their fees are competitive.
"It's interesting, but it's not surprising," said Patricia D. Jackson, partner with Deloitte & Touche LLP, New York. "A number of services come without a fee, but there is no such thing as a free lunch or free communication, and plan sponsors are failing to investigate the underlying fees for their plans."
Knowledge is power
There might be some respondents who meant they did not wish to take the time to compute exactly how much their fees are, Ms. Jackson said. "However, is that the best approach a plan sponsor could take?" she queried. "Power is in that information."
Fee information can be used during negotiations with service providers for the benefit of the plan and the participants, she added.
"Employers should take a more aggressive stance to truly understand what their expense ratios are and what the indirect fees are," Ms. Jackson said.
But getting that information might take some doing because investment management fees and fund operating expenses are deducted from fund returns and are not reported as a separate expense, she said.
"They are translated not to a hard-dollar number but represented as a basis point, which is less intuitive to what the plan is being charged," Ms. Jackson said.
Even savvy plan sponsors agree that obtaining the fee information takes some doing.
"Fees are often invisible, and it takes some effort to get the information," said Joe Schuster, manager of qualified plans for Compuware Corp., Farmington Hills, Mich. "Most of the real cost and expense is picked up by the participant in the investment management fees. Service providers are not willing to work to get the weighted average expense ratio to decrease fees."
Service providers are more willing to offer a proprietary index fund as a way of reducing fees, Mr. Schuster said. Compuware pays all of the fees except investment management fees and costs associated with purchasing company stock, he explained. Expenses for the company's $325 million 401(k) plan are between $70,000 and $80,000 annually, he said.
The specter of litigation
Knowledge is not only power, but it also could protect the plan sponsor from getting into legal trouble later on.
"It's OK (to not know a plan's fees) if you are running a widget factory. Nonetheless, the law is real clear that plan sponsors have to regularly monitor their activities," said William A. Schmidt, partner with the Washington law firm, Kirkpatrick & Lockhart LLP.
These responsibilities include having a firm grasp on fees, he added.
Plan sponsors are held to the prudent expert standard. They are required to review their fee structure periodically and ensure it continues to be appropriate, Mr. Schmidt said.
"Courts contrast what fiduciaries do with their own money and that of a 401(k) plan," he said. "Employers spend a lot of time thinking about who they will hire to manage their defined benefit plan and what they will pay them. It's damaging if they don't take the same degree of due diligence to make the same decisions for their 401(k) plans, for which the risk is with the employees."
Four years ago, The Vanguard Group Inc. began sending plan sponsors an annual statement specifying their investment management fees, said Paul Heller, principal at the Valley Forge, Pa.-based firm.
"We have over 1,300 clients and we think it's really important they understand what they and their participants are paying," Mr. Heller said. "Some plan sponsors confuse their expenses with what they are paying out-of-pocket. A plan sponsor may be paying nothing out-of-pocket so they think, `I guess it's low cost,' but they may have funds in the plan that run 100 basis points."
Many plan sponsors don't take the time to add it all up, said Mr. Heller, who heads Vanguard's defined contribution business.
