Defined contribution plan participants continue to bear more of the administrative and investment management fees, but few are complaining about the cost shift, say consultants.
The move to daily valued, bundled mutual fund services, either through a fund family or an employee benefit consultant's alliance, has resulted in changes in traditional fees structures.
Bundled services generally lump all fees together, making it nearly impossible for a plan sponsor to pick which plan administration fees will be paid by the company and which by the plan participant. In an unbundled service environment, separate fees from the separate vendors servicing the plan were easily split between the plan and the employer.
"When a plan sponsor makes a decision to offer mutual funds, the decision is made right there to pass on investment management fees to the plan, because those fees are calculated every day from fund assets, just as is true with any retail investor," said Gail Kellogg, a principal at Hewitt Associates, Lincolnshire, Ill.
Some record-keeping, administrative and communication services also are included in the investment management fee for mutual fund use, and for 401(k) plans a per-participant fee also is charged, except for the largest plans.
"There is a significant cost-shifting trend to employees, partly because of the imbedding of record-keeping and administrative costs within the investment management fee charged to the plan. Who really bears the cost of defined contribution plan administration is becoming blurred because of this use of retail mutual funds by plan sponsors," said James Klein, a principal at Towers Perrin, New York. "It's a classic mutual fund ploy to waive the additional per-participant cost (the record-keeping) for the plan sponsor. It makes them look good, but in effect, a sizable chunk of record-keeping expenses are already buried within the retail mutual fund fee charged anyway."
But consultants say despite the cost shift, plan participants really aren't complaining. "Participants aren't sophisticated enough to really understand the cost shift and are very unlikely ever to reach that point," said Lou Valentino, director of Defined Contribution Plan Services, Wyatt Asset Management, New York. "Generally, plan participants are so delighted with daily valuation, voice-response systems, better communications and name-brand mutual funds, that the bearing of more of the cost of these services really isn't a question. In fact, they are likely to want to pay a bit more, where necessary, to get really good funds and service, than to save a few pennies with inferior service and poor fund selection."
Outsourcing of all defined contribution plan services can be a very attractive prospect for many companies, because all plan expenses can be shifted to employees. Without a bundled approach, a number of expenses, such as compensation for internal employee benefits staff, can't be charged to the plan under normal circumstances.
"For a lot of plans, a move to a bundled service can be a move from rather inferior service from internal staff to a sterling service from an outside vendor. One company simply could never afford the kind of systems a service vendor on the outside can provide. In many cases, companies see a big cost savings by moving to bundled services. But the trend has shifted many costs over to the plan participant, which weren't his or her responsibility before," said Hewitt's Ms. Kellogg.