A popular belief among retirement plan sponsors is no more than a myth, according to a new report from CEM Benchmarking released Aug. 21.
Plan sponsors often believe that average balances in workers’ retirement accounts impact record-keeping fees, with many assuming that the higher the average balance the lower the plan’s overall fees.
In fact, higher average account balances do not lead to lower record-keeping costs, the report found.
“One of the most significant findings was that the per-participant balance is not significant,” said Janjaap Weeda, product manager of defined contribution at CEM Benchmarking.
Average record-keeping costs in defined contribution retirement plans vary widely, ranging anywhere from $20 to $80 per participant per year, according to the report.
To help explain the wide differences in cost per participant, CEM Benchmarking collected record-keeping fees from 123 plan sponsors in its database of plans totaling $1.3 trillion in assets.
CEM found that the number of participants, rather than their average account balances, mattered in lowering record-keeping fees.
The report found that a 10% increase in the total number of participants led to a 1.6% decrease in the cost per participant.
Put more simply, when a plan doubles in participant count, record-keeping costs drop by 16%.
Investment lineups
An even bigger factor in bringing down costs stems from the availability of proprietary record-keeper products in plan investment lineups.
When a retirement plan includes the record-keeper’s investment options, costs fall by 18%.
Managed accounts also lower fees. Plans offering managed account services have a cost per participant that is about 13.3% lower than plans without managed accounts, the report found.
"Record-keeping fees may be lower when managed accounts or proprietary investment options are used in DC plans is that the record keeper or its parent company can earn additional revenue streams from those offerings,” said Holly Tardif, director of retirement at Willis Towers Watson.
Tardif explained that while retirement plan participants may see lower record-keeping fees, they could end up paying more when considering the total plan cost.
“It's important for plan sponsors to evaluate the full financial impact on participants, not just the headline fees, and to assess each component fee on its own merit to ensure that the overall structure is in the best interest of their participants,” she said.
CEM Benchmarking estimates that plan size, availability of managed accounts and the use of a record-keeper’s proprietary investment alternatives account for close to 25% of the variance in record-keeping costs.
