The Money Detectives
By benchmarking record keepers, HR leaders may be able to slash their organizations' 401(k) administration fees.
By Carol Patton
Several years ago, Dinsmore law firm approached the record keeper of its retirement plan in hopes of reducing the administration fees associated with its 401(k). But the law firm was "rebuffed," recalls Ben Wells, a partner at the firm, which has approximately 1,000 employees in Ohio, Kentucky, Pennsylvania, West Virginia and Washington D.C.
"[The record keeper] said, 'Your plan is not as profitable as it used to be because you have a lot of people in self-directed accounts and you've had some [people with] large accounts take out distributions, so we really can't work with you very much,' " says Wells, who chairs the firm's fringe-benefits committee and works side-by-side with HR regarding retirement issues.
How times have changed. Dinsmore has since slashed its fees by roughly six figures each year, partly due to 2012 Department of Labor regulations (408(b)(2) and 404(a)( 5)), requiring plan sponsors and record keepers of 401(k) plans to fully disclose plan fees to participants. The regulations are intended to create transparency of plan fees and enhance awareness among plan sponsors and participants of those fees, and ensure those fees are "reasonable" across the board. To comply with the federal rule, companies such as Dinsmore started benchmarking their fees to ensure they're competitive, forcing some record keepers to dramatically cut their fees or risk losing their business.
But what, exactly, is "reasonable"? Because the DOL offers no definition, some companies are benchmarking or comparing fees of various record keepers so they'll have more bargaining power when negotiating for a better deal. The process, however, can be grueling, especially for HR professionals who may lack the necessary knowledge or technical expertise about retirement plans. Not everyone can go toe-to-toe with record keepers when trying to get the best deal. In some cases, companies are partnering with insurance brokerages or consulting firms, ensuring that record keepers sharpen their pencils and offer competitive or reasonable fees.
In 2011, Dinsmore partnered with Cincinnati-based HORAN, an employee-benefits consultancy, to conduct a benchmarking study of its fees. Wells says the last time it analyzed fees was roughly a decade ago via a request-for-proposal process.
"When they broke out the record-keeping fees, they didn't seem unreasonable," says Wells. "But there was a lot of cushion between that amount and the income that was being generated from the plan. Once we had the information and were all dealing from the same knowledge base, [our record keeper] was pretty willing to work with us and made it clear that it wanted to keep our business."
Wells and HR worked as a team, he says, explaining that they were both intimately involved in the entire benchmarking and negotiation process. He says HORAN initially contacted about a dozen record keepers, then narrowed down the benchmarking list to roughly six providers.
Although the process went smoothly, he says, he was surprised there were such large opportunities for savings.
A good example was the availability of different fund classes with lower expense ratios. Every fund has an expense ratio, Wells says, adding that participants in most large plans can invest in funds with lower expense ratios. The company's current record keeper helped the company invest in such funds, something it never offered in the past.
"They had to present the best arrangement because they were competing with other providers," says Wells.
During negotiations, he says, his firm would sometimes play the "good cop role" while HORAN served as the bad cop, enabling the law firm to maintain the positive relationship it had with its current record keeper while scrutinizing fees.
"HORAN kept asking, 'What else can you offer?' while we probably wouldn't have been as aggressive," he says. Because of HORAN's persistence, the record keeper offered free educational meetings for employees, something it refused to discuss when previously requested by the law firm.
The company expects to benchmark record-keeping fees every four to five years. Federal regulations aside, he says the end result -- fee transparency -- is worth the effort.
"Our provider was much more willing to open up its internal costs and income generators to us," Wells says. "We were able to really drill down and determine where we had opportunities to save money and gain more return for the plan but still provide fair compensation to the provider we were using."
Shop and Compare
The benchmarking process typically involves three key steps: knowing and understanding your fees, going to market and evaluating the results, says David Lohre, vice president for investment and retirement-plan consulting at HORAN, which is also a United Benefit Advisors partner firm.
The process is a lot like buying a car, he says. It's common practice to compare makes, models, options and prices at various dealerships before purchasing a vehicle. The same holds true with fees. The DOL isn't seeking a magic number regarding reasonable fees, he says, but expects employers to shop around and document their actions so they can make informed decisions.
However, the absolute worst thing HR can do is nothing, which typically leads to trouble.
Perhaps the poster child for trouble is the lawsuit Tussey vs. ABB Inc. In a ruling issued last March, a Missouri federal district court found that fiduciaries at ABB, a Zurich, Switzerland-based global manufacturer of power and automatic equipment, never calculated the amount of record-keeping fees paid to its provider (Fidelity) or benchmarked the cost of those fees. Worse yet, the fiduciaries ignored their own consultant, who claimed that Fidelity's fees were too high. In the end, the company paid an even higher price -- more than $35 million in damages. The court required ABB to pay its plaintiff class $13.4 million and negotiate $21.8 million in rebates from Fidelity. It also fined Fidelity $1.7 million.
"We believe Tussey v. ABB reinforces three key aspects of fiduciary responsibility," says Lohre. He points to the need for plan sponsors to follow their investment-policy statement, make decisions that are in the best interest of participants and understand all plan fees -- hard dollar and revenue sharing -- to ensure they are "reasonable" by periodically benchmarking plan fees.
When benchmarking, Lohre says, HR professionals need to survey several record keepers -- including their current vendor -- every three to five years. Lay out the specifics of their plan. Before quoting costs, record keepers require a lot of information, including the plan's asset size, number of participants, company matches, profit-sharing contributions and withdrawal amounts, and any complexities, such as whether the plan offers participant loans.
Employers will also need information from record keepers before any decisions can be made. For example, how many assets does the record keeper manage? How many plans? How many clients does the account manager oversee? What types of educational resources are available? Can representatives conduct group or one-on-one meetings with participants? Can they provide a demo of their website?
HR also needs to establish selection criteria, says Lohre. What will it take to switch to a new record keeper or keep its current vendor? Is cost the main focus? Or are additional services needed?
"A lot of this is focused on fees but what is also wrapped in 'reasonable' are the services you're getting," says Lohre, adding that -- based on the nearly 10 benchmarkings his company performed over the last year -- clients averaged between 15 percent and 25 percent in fee savings. "A lot of HR execs are finding they're getting more services out of these providers, whether it's educational resources or different products they didn't know were available and [ones they] could take advantage of."
Uncovering Disguised Fees
Bill Peartree estimates that, prior to the DOL's new transparency rules, something like 80 percent of employers had no idea of the total fee charged by their record keeper for managing their 401(k) or even who paid for what services.
Peartree, a principal and director of retirement services at San Diego-based national insurance-brokerage firm Barney & Barney, says that until recently, employers rarely considered asking their current record keeper any questions about their fees or services, not even how much was needed to administer the plan or what additional services were being offered.
"In many cases, HR doesn't know what it doesn't know," he says, adding that some record keepers revealed employee fees in reports that were 12 to 20 pages long, creating more confusion than clarity. "[HR has] to be knowledgeable enough to ask the right questions."
Those questions need to target four areas of a retirement plan: plan design, fees, investment due diligence, and employee communication. But HR may just focus on the plan's investment lineup or developing employee communications. HR is responsible for so many different activities that fees can easily fall through the cracks, says Peartree.
His firm conducts annual, semi-annual and sometimes quarterly client meetings to review those four elements. A portion of those meetings is dedicated to fees and expenses. He says it's important to outline all fees as well as who is paying for each type.
To find out how their fees stack up, Peartree suggests HR professionals use the 401(k) Averages Book (published by Pension Data Source Inc.), which offers comparative 401k average cost information. Another is the rating service brightscope.com -- with the caveat, he says, that it compares plans based on industry rather than asset size, which typically impacts fees. So a small bioscience firm with $2 million in its retirement plan may be benchmarked with Abbott Labs, which may have $40 billion in its plan. Still, companies may find it useful if employers comparable in size to their own organization are rated, says Peartree.
Another tip is for HR to ask its current record keeper to price the plan as if its company was a new client. Peartree tells the story of how he initially asked a client's record keeper to re-evaluate the fees associated with the plan. It agreed to lower it by one basis point, which is equivalent to 1/100th of 1 percent.
"I said I will not even bother my client for one basis point," he recalls. "I said, 'Go back to your underwriters and price this plan as if we're a new client.' Lo and behold, their fees dropped by 11 basis points."
Other times, HR may be surprised at the types of services offered by record keepers that are either new or were never mentioned during negotiations. They may include managing direct email or mail-marketing campaigns, moving into generational-type messaging in which different emails are sent to different age groups to encourage participation, or building custom, company-branded websites. As an example of the latter, he points to Eddie Bauer, which -- as a negotiated part of the retailer's service -- had its record keeper build a 401(k) employee website to resemble the company's catalog.
He suggests that companies survey between two and five vendors, adding that the smaller the plan, the fewer the record keepers that need to be surveyed. If for no other reason, companies need to benchmark because doing so can uncover fees that may be completely disguised.
"Say you had a $50-million plan," Peartree says. "[A record keeper] says it's not going to charge you any billable expenses for your plan. Do you really think it will do all of the administration and record keeping for free? Absolutely not . . .
"Where some mutual-fund record keepers have been bitten," he says, "is when the fees they're collecting to do the administration and record keeping are born by the employees and are over and above what they should be paying for comparable funds. That's where the challenge lies."