Sponsors of small and midsize plans may be paying too much in fees, particularly if they're being charged a percentage of total plan assets, according to industry experts.
In 2017, participants in a defined contribution plan with fewer than 1,000 participants paid a median 0.6% of assets in total fees, while those with more than 15,000 paid only 0.4%, according to a survey by NEPC LLC, a Boston-based investment consulting firm.
"Every survey you see, I don't care who does it, confirms the same thing," said Jack Towarnicky, the Columbus, Ohio-based executive director of the Plan Sponsor Council of America. Fees charged to plans with fewer participants and smaller average balances are higher both in dollar amount and percentage of assets than in larger plans, he said.
The disparity can be attributed to both the plan sponsors themselves and the record keepers. Sponsors of small and midsize plans often don't have the time or knowledge to benchmark fees. Meanwhile, record keepers have pursued their own self-interest, pushing smaller plans into asset-based fee models, which may hurt participants long term, industry observers say.
While asset-based fee arrangements — those that charge a percentage of plan assets — might initially be advantageous to plan sponsors, they can quickly become
expensive as the plans grow.
Over the past 10 to 12 years, large plan sponsors have negotiated fixed-dollar fees with their vendors, while smaller plans have tended to pay fees using basis points on assets, Mr. Towarnicky said. Almost 2 in 3 plans with fewer than 50 employees paid either a percentage of assets (39.5%) or a combination of an asset-based and a per-participant fee (24.6%), according to PSCA's 2018 61st annual survey of 598 profit-sharing and 401(k) plans. That's "exactly the opposite" of large employers with more than 5,000 employees, where 63.7% paid a fixed-dollar amount based on the number of participants, Mr. Towarnicky said.