While we know it shouldn’t be all about fees, it’s clear that fees can – and should – have an impact on provider selection.
Asked to quantify a basis point differential that might justify changing providers, a quarter of respondents to this week’s reader poll put it in the 10-15 basis point range, with 14% opting for 15-20 basis points, another 12% placing it at more than 25 basis points, and about 6% weighing in with 20-25 basis points. While slightly more (about 9%) said that wasn’t a primary factor, a plurality (36%) basically went with an “it depends” response. “Based on plan size I'd suggest more than a 10% savings to participants," noted one reader. “There is no specific amount – it depends on the value you get for the fee paid,” noted another.
“Size of the plan matters and truthfully working out the maximum amount any one person pays for recordkeeping should matter and working out the maximum the plan should pay for recordkeeping should matter,” noted another. “It depends on the size of the plan. Less than 10 bps on a $50+ million plan is still a lot of money. For a $1 million plan, not so much,” explained another. “Depends,” agreed another respondent, who went on to note that “perhaps a larger plan would have 5 bps of savings and that could represent a percentage savings of 25-30% which would dictate change, whereas, a plan under $20 million might consider changing for 10 bps or more.”
“Depending on how large the plan is. I find as a plan is growing in its first couple years a large improvement needs to occur more than 25 bps,” another pointed out. “After a plan is in the single digit millions, 15-20 bps. As it approaches 10+ million so much more comes into the decision other than price.”
Another weighed in noting that “It's not a basis point but a % over current price plus additional services. All services being equal our plans would only change for a 20% savings or over $20k a year. 5 basis points on a $100M plan is $50,000. That is easily worth the savings.”
“Depends on value,” said another reader. “Services vs. cost is the factor that matters most. I’ve seen clients go strictly based on cost only to be disappointed later. That said, the variability of costs between providers should not be greater than 25%.”
Variables Varied
We also asked readers how they generally responded to the pricing variables promoted by recordkeepers, e.g. use of proprietary TDFs, or Guaranteed Accounts, QDIA to managed accounts. Here a plurality (though only a third) said they presented those offers to their clients, after explaining how the pricing levers worked, while a quarter said they rejected these offers “because of the possibly unfair impact on head-to-head pricing comparisons.” Nearly as many (22%) said it depended on the situation/client, and the remainder went with an “other” option, including the following:
- “Ask the providers to bid without having any proprietary products in the investment menu or advice program.”
- “Present offers to client, and explain how pricing works and risk associated with proprietary funds. As long as proper due diligence is completed and better pricing can be achieved, it may be advantageous for the client.”
Another said they “Present all offers with no pricing reductions due to these variables included initially, however present them as options should the client feel those levers are a good fit for their employees.” Still another explained that it was “Important to have an independent review by an investment consultant and then take into account the suitability of the offer based on the investment consultant's advice and pricing to present the fullest picture.”
“Only after a recordkeeper is selected do we present cost benefits of using proprietary funds,” said another. “This is after a thorough review of the investment options to determine if we would even recommend them to the Committee for their consideration.”
“Proprietary TDF or ‘guaranteed’ accounts may not be in the best interest of the client,” cautioned another. “All investments should be benchmarked for other factors than price.”
Fiduciary Factors?
As for any shifts in how providers position/reposition their offerings/incentives/pricing since the advent of the fiduciary regulation – the picture was quite varied:
30% - some, not much
22% - not really
17% - among some, not all
16% - among most, not all
15% - lots
More than half (61%) said that plan sponsors were relying on a third-party benchmark, while more than 4 in 10 (44%) had observed that plan sponsors were documenting their fees in committee meetings, and another 41% (more than one response was permitted) noted that they were conducting RFIs as a way of benchmarking. Just 3% noted that plan sponsors were memorializing fees in a separate fee policy. Asked to identify a single common approach by plan sponsors, relying on the third party benchmark and formally documenting their fees in committee meetings stood apart.
“Relying on trusted advisers to do the work for them and present to the investment committee for approval,” observed one reader. Another said that “A lot of fee disclosures are still hard to understand and small business owners are usually too busy (we mainly work with small businesses, including start-up plans.” Still another said that plan sponsors were “…unaware of pricing variables and approaching this purchase like buying a carton of eggs.”
“Using provider fee disclosures as the means for reviewing plan related fees,” explained another.
Other Comments
We received a lot of interesting comments this week – here’s a sampling:
- “There seems to be ‘tiers’ of recordkeepers based on fees and the services and products they make available. We used to see wider variances in fees, but fee differentials within the tiers seem to have tightened up considerably over the past few years.”
- “With fee compression in the spotlight, more vendors are pushing their own managed accounts as a way to generate additional revenue. This is a hidden fee as it’s not reported as RK revenue. This will become a liability to the sponsor if those fees are not managed as well.”
- “Everything is on the table for scrutiny as long as there is a lot of money to be made by lawyers leading class action lawsuits.”
- “Usually the incumbent provider is willing to lower fees to the competitive range of the bidding providers. Most of our plans change providers because of poor service.”
- “There is a lot of fee compression. But if advisors step up and document their value across the board then plan sponsors will have to take notice. Everything can't be free in this market segment.”
- “I find that most plan sponsors don't understand their duties and obligations to act in the participants’ best interests.”
- “Margins have definitely tightened. Recordkeepers seem to have wide swings in pricing based on demographics of plans.”
- “Most small to mid-size plan sponsors either do not care about value they receive for price, don’t want to understand what they get vs what they are paying for, or their advisor just caves in as well and doesn’t take the time to explain differences in platforms. After all they do not want to muddy the waters and if their client says lowest cost is what they want as long as advisor keep their bps and client they seem to be indifferent. So at times it really does just become a conversation about who has lowest fees. The lower the provider or RK fee is, or go to passive lineup w/o much thought, advisor can keep comp same and still show overall plan cost has gone down. Overall it continues to be a disappointing process.”
- “There is also the unstated, post-sale push of proprietary products. Compensation of some relationship managers is dependent on prop fund sales/adds/retention.”
- “It is still difficult to get most providers to give true costs.”
Thanks to everyone who participated in our weekly NAPA Net reader poll!
Oh, and don’t forget to weigh in on topics for the NAPA 401(k) Summit – and check out SummiTalk! It’s not too soon to be thinking about – and planning for – the NAPA 401(k) Summit! Check it out at http://napasummit.org.
