Reader Poll: The Future of 401(k) Fees

A recent report notes that the average expense ratios that 401(k) plan participants pay have fallen for the seventh year in a row – and that’s largely consistent with how NAPA Net readers see it trending as well.

Nearly three-quarters (72%) said that plan fees have gone down over the past five years, while another 14% said it had been a “mixed bag.” Only about 11% said those fees had been pretty flat, and the remaining 3% said those fees have risen.

That said, even among those who said the fees had gone up, more than 60% said they had risen by 5% or less, with the remainder spilt between those who said they had risen by 10-15%, and those who said more than 15%.

On the other hand, among those who noted that those fees had decreased – well, it was all over the place:

39% – down 10%-15%
29% – down 0%-5%
21% – down 5%-10%
7% – down more than 15%

The rest noted that the decreases were varied, depending on the plan.

A Hiring Factor?

Fees remain a factor in hiring decisions – a full 75% said they were a factor, and nearly 18% said they were a major factor in the plans they successfully bid on over the past five years. For the remaining 7%, fees were said to be a minor factor.

As for situations where respondents bid, but were not successful in acquiring business, fees were said to be a factor in half (51%) of the cases, a minor factor for 18%, and a major factor in 15%. The rest split between those who said they didn’t know it was a factor, and those who noted that the prospect said it was a factor, but there was doubt.

We asked readers to weigh in on what they thought the next five years would bring on the fee front, and got the following responses:

31% – they’ll remain flat
27% – they’ll go down a little
24% – they’ll go down some
11% – they’ll go up a little
7% – they’ll go up some

Size Splits

Asked specifically about the trends among larger plans (on average), the trend was clearly lower: 39% of this week’s respondents thought 401(k) fees would remain flat, 32% thought they would go down a little, and 29% were of the opinion they would go down some.

As for smaller plans – well, their fee future looks to be a bit more mixed. This week’s respondents saw the following over the next five years:

23% – they’ll remain flat
20% – they’ll go down a little
18% – they’ll go down some
14% – they’ll go up some
11% – they’ll go up a little
11% – they’ll go up a little
3% – they’ll go up a lot

Reader Comments

We did, of course, get a number of reader comments. Here’s a sampling:

  • My biggest issue is the allocation of fees… spreading fees proportionately and also unbundling services. There are still services lumped in that we don’t need or want (e.g., employee meetings).
  • Small plan market is the most impacted. Their fees continue to rise and become almost not affordable. Many providers in this space may exit. GVA solutions at the insurance providers will be hard to justify and deal with any possible additional disclosures. The plans over $5M will see a decrease in fees and the large plans will see a bigger fee reduction because that space is more competitive and fees have to be competitive for providers to win that business.
  • Plan sponsors are much more educated on plan costs and options for paying plan fees, whether through the use of plan investments or via an alternative more transparent method, than they were 5 years ago. That said, the work load and staffing has increased, which ultimately will increase the fees we have to pass on to our clients.
  • I see plans much more interested in fee equalization. Using the most efficient net share class, returning rev share to the participant then adding a flat fee or bps.
  • Increased use of index funds is the biggest factor in the downward fee trend.
  • I think on larger 401k plans, fees will continue to go down and more companies will utilize flat dollar amounts instead of basis points for various fees.
  • More sponsors will flock to index funds in an effort to avoid the conversation altogether, just in time for the battle of the loss-leader index race, and cycling in of active outperforming passive. But don’t worry about getting good funds, just worry about getting cheap funds (read with dripping sarcasm).
  • Fees are up because plans are larger.
  • I feel like most plan sponsors are looking solely at cost and not really assessing value. They have an unrealistic expectation of high customer service with extremely low fees. Great customer service requires higher staffing so it’s reasonable for it to cost more. But even if a TPA provides great customer service, when they’re not working with participants and/or interacting with owners, it’s easy to be seen as interchangeable with any other TPA.
  • If the plan has grown, most of the time you can get a bit lower bid. But very small plans and start-ups will need to have higher fees to just pay for needed services.
  • I was quoting a relatively large plan, 4150 million blindly. I sent the quote to an existing partner/recordkeeper. I guess they forgot the fact that I track my book of business pretty closely. They came in at half!!!!! the cost of two plans I have on the books. As I am a fiduciary to all plans, this puts me in a really bad spot. I had no choice to go back and make them match the price for loyal existing clients. This game needs to stop. Price plans fairly and profitably, this is a real challenge but i guess my two clients got great deals without me having another formal bid…
  • Small plans will see higher TPA, recordkeeping and advisory fees. Fees on actively managed mutual funds should continue to go down.
  • I have seen more caps on asset based fees in recent years as well as much better explanations and breakdown of fees in the mid market (my focus). Also, with this there is a lot less forgiveness of fees or error so that everything that is caused by the client is being charged back to them where it may have been absorbed by the provider in the past.
  • Fees are a factor, but if the client sees value then the fee discussion is minimal.

Thanks to everyone who participated in our weekly NAPA Net reader poll!

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