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Record Keeper Fees Drop 10%

On the surface, a recent NEPC study which tracks DC record keeper fees shows a continued decline in fees, as well as increased concern and activity by DC plan sponsors regarding fees. But a different story lies beneath the surface.

According to the 11th Annual NEPC Defined Contribution Plan and Fee Survey, record keeper fees dropped from 0.46% in 2014 to just 0.42% in 2015. Meanwhile, 82% of 401(k) plan sponsors have renegotiated their record fees since 2013, resulting in an almost 10% reduction from 2014 to 2015; 50% of 401(k) plan sponsors changed one or more funds in 2014 and 29% did so in 2015.

Benchmarking fees are the biggest challenge for plan sponsors, according to the report, just behind trying to find the appropriate record keeper. If larger plans covered by the NEPC study are having a hard time, imagine the struggle for mid-size and smaller plans just beginning to come to grips with the spider web of share classes and revenue sharing, as well as the fear that lawsuits might come down market.

Alarmists might point to the NEPC study as a clear sign of the end of high-level service and a race to the bottom with an unhealthy focus on fees. But look a bit closer. Most record keeping fees are asset based; during the same period, the S&P 500 grew by 12% and the Dow Jones Index by 10%.

The wave of consolidation and increased use of technology has driven down costs — record keepers’ willingness to lower prices means there’s more capacity in the system. Only when record keepers come close to capacity will they either hold to current prices or even raise them — just like the airline industry.

The NEPC study is a bit more foreboding for plan advisors because it suggests that plan sponsors are focused on all fees for all services, whether record keeping, investments or advisory. With hundreds of thousands of advisors working on a DC plan in some way, the competition is more like that among lawn maintenance companies, with low capital costs and many willing to take the job at almost any price. Though the DOL fiduciary rule may force some advisors out (see DOL Fiduciary Rule to Trigger Big Asset, Revenue Shifts), it’s just not going to happen overnight. And it’s impossible for almost all plan advisors, regardless of their level of experience, to hold steady on pricing, never mind resist the temptation to bid lower.

Opinions expressed are those of the author, and do not necessarily reflect the views of NAPA or its members.

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