Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Innovation Investing Conference
    • 2022 Defined Contribution East Conference
    • 2022 ESG Investing Conference
    • 2022 DC Investment Lineup Conference
    • 2022 Alternatives Investing Conference
Breadcrumb
  1. Home
  2. DEFINED CONTRIBUTION
April 15, 2019 01:00 AM

Fee disparity linked to size of defined contribution plans

Most smaller plans pay asset-based fee rather than per-participant rate

Margarida Correia
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Jack Towarnicky cited survey data showing the disparity in fees paid by smaller plans vs. larger plans.

    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.

    Shifting to fixed fees

    Leslie Smith, a partner and national DC plan consulting practice leader for Aon PLC in Somerset, N.J., agreed that fixed fees are more prevalent among larger plans. "We're seeing fees move toward a per-participant fee model but a lot of (plans) in the small market are still (charged) asset-based fees," she said.

    Ms. Smith said the larger plans initiated the shift away from asset-based fees about 10 years ago, but that it's now moving slowly "down market" to the smaller plans.

    "It takes time," she said.

    Ascensus LLC, a record keeper that primarily serves small and midsize plans, for example, moved to fixed fee-based pricing in 2005. "Our fees are predicated entirely on the number of people in the plan," said Jason Crane, the Deerfield, Ill.-based head of retirement sales at Ascensus. "It's very easily understood exactly what it is we charge for and exactly what we're charging."

    The record keeper had nearly 58,000 plan sponsor clients with less than 1,000 employees and oversaw $67.8 billion in assets as of Sept. 30, according to Pensions & Investments data.

    Mr. Crane said that because none of the firm's fees are asset-based, its "revenue doesn't grow as the plan grows or at least as the plan assets grow in the absence of growth of the underlying employee population."

    "We think that's where the market is very much heading. We've been there for a decade-plus," he said.

    Asset-based pricing, of course, can work to a sponsor's benefit. At times it can be less expensive than what a record keeper might be willing to quote in a per-participant fee model, said Aon's Ms. Smith. The problem is, "there will come a point where plans might be overpaying based on the growth of their assets and the new calculation of the fees," she said.

    Three Bell Capital, a registered investment adviser that serves venture capital firms and other small employers in Northern California, has worked with plan sponsor clients to shift between 40% and 50% of plans that were asset-based to a fixed per-participant fee or a mix of asset- and fixed fee-based pricing since 2016, said Andre Huaman, a partner with the firm in Los Altos, Calif. Mr. Huaman could not determine the level of fee reductions that resulted from the changes but said that it was reasonable for sponsors of healthy small plans to expect double-digit percentage decreases in pricing every two to three years.

    Cap on asset-based fees

    Oystein Konsmo, the Tucson, Ariz.-based chief financial officer of independent mortgage bank Nova Financial & Investment Corp. opted for asset-based pricing with a cap about three years ago. The cap put a limit on fees, an arrangement that made sense for the bank's $22 million plan, Mr. Konsmo said.

    While Mr. Konsmo declined to disclose the amount of the cap or the basis points charged on assets, he noted that the plan hit the cap quickly due to the plan's rapid growth. The plan doubled its assets in the past three to four years due to implementing auto-enrollment and auto-escalation plan features that led to a participation rate of more than 90%.

    Given the plan's robust growth, the company does benchmarking every quarter to make sure fees are reasonable because "they can easily eat into earnings," he said.

    Mr. Konsmo echoed a widely held industry mantra. "It's extremely important for the plan sponsors and the fiduciaries of the plans to be benchmarking the fees on a regular basis," said Aon's Ms. Smith.

    Ms. Smith recommends that plan sponsors benchmark their plans at least once every three years and then do a full RFP once every five to six years. For asset-based plans, she recommends doing fee benchmarking more frequently because "if they grow very large, the fees could get out of line very quickly."

    "In the small and midsized market, there's a lot of wiggle room in pricing," said Three Bell's Mr. Huaman.

    If a $20 million plan becomes a $25 million plan in 12 months, Mr. Huaman says he will tell the record keeper that if it wants to keep the business, it "will need to come down a little bit."

    "If you're prudent as an adviser and you have good relationships with the record keepers and the providers, you could ask every year, 'we want you to relook at pricing in this plan,'" Mr. Huaman said.

    "If I can get my clients reduced 10% every two to three years on a $15 million plan, that's good," he said.

    Related Articles
    Optimism abounds on new savings pillar
    Cybersecurity still key issue for record keepers
    Smaller plans face a bigger burden for cybersecurity
    Investors continue to pay lower fees on mutual funds, ETFs – Morningstar
    Strategy, portfolio size big factors in difference between quoted, negotiated f…
    Aon adds senior consultant to risk settlement team
    Incentive-based fee structures could hurt manager revenue over long-term – Fitch
    Recommended for You
    ONLINE_180809968_AR_0_VQQIXIFGJLZN.jpg
    Thrift Savings Plan readies plan upgrades, mutual fund window opening
    Retirement Plans_i.jpg
    Top priority for smaller DC plans: improving financial wellness programs
    Rene Martel
    Managed accounts are coming up short, some say
    OCIO, Anchor in Rough Seas
    Sponsored Content: OCIO, Anchor in Rough Seas

    Reader Poll

    May 23, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Crossroads: Politics, Inflation, & Bonds
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Q2 2022 Credit Outlook: Carry On
    Leverage does not equal risk
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    May 23, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Innovation Investing Conference
      • 2022 Defined Contribution East Conference
      • 2022 ESG Investing Conference
      • 2022 DC Investment Lineup Conference
      • 2022 Alternatives Investing Conference