Average 401(k) Fee is 72 Basis Points, Study Says

The median fee for the 130 plans in the study of the economics of 401(k) and defined contribution retirement plans released today by the Investment Company Institute and Deloitte was 0.72% of assets, within a range from 0.35% (the 10th percentile) to 1.72% (the 90th percentile) of assets. The median annual plan fee per participant was $346 (for a participant with an account balance of $48,522—the median participant average account balance among plans in the survey).

There was, however, quite a bit of variance, even in the relatively small sampling; 10% of plans in the study had an ‘all-in’ fee of 0.35% of assets or less, while a matching 10% of plans had an ‘all-in’ fee of 1.72% of assets or more.

The authors said that a key study finding was that, for the companies surveyed in the study, Defined Contribution/401(k) Fee Study, the number of participants and the average account balance are primary drivers of fees, with the larger plans in the study enjoying what was described a “significant economies of scale” because they can spread fixed administrative costs over more assets and participants.

“The study also revealed a number of other factors that do not tend to drive fees for the companies studied,” explains Daniel Rosshirt, a principal with Deloitte Consulting, which led the research effort. “These factors include the number of payrolls that a plan sponsor has, which might have increased complexity; whether plan services are provided by a mutual fund sponsor, life insurance company, bank, or third party; the plan’s tenure with the service provider; or the percentage of assets invested in proprietary investments of the service.”

The new study looked at total fees charged across a broad sample of defined contribution plans with a range of plan sizes, service levels, investment offerings, service providers, and fee structures. The survey, which gathered more than 1,000 data points from each of the 130 plans studied, allowed Deloitte researchers to calculate an “all-in” fee for each plan that captured administrative and investment-related fees as a percentage of plan assets. The all-in fee was based on four primary service elements: investment management, administration, recordkeeping, communication and education, financial advice to participants, and plan sponsor investment consulting. However, it excluded participant activity-related fees that only apply to particular participants engaged in the activity (e.g., loan fees).

Who Pays?

According to survey respondents, plan participants pay 83% of the total plan fees while employers cover 13% and the plans cover 4%. Of the participant fees, most is derived from the investment holdings and the asset-based charges primarily associated within investment expense ratios (some of which may be used to cover recordkeeping and administration). Indeed, while the study’s authors noted that the ‘all-in’ fee varied widely due to a number of plan-related variables, but that total plan assets appeared to be the most significant driver.

The study said that further analysis suggested that a more meaningful way to view plan asset size is through two independent factors: number of participants and average account balance.

Secondary Drivers

The report noted that secondary drivers can help explain why plans of similar asset or participant size may have different overall costs, and that one or more of the following characteristics appears to be related to lower all-in fees:

• higher participant and employer contribution rates
• lower allocation of assets in equity-oriented asset classes
• use of auto-enrollment
• fewer plan sponsor business locations reducing the servicing complexity
• other plan sponsor business relationships with the service provider (e.g., defined benefit plan or health and welfare plan).

Fee Components

• Asset-based investment-related fees represent about three-quarters (74%) of defined contribution/401(k) plan fees and expenses for the plans in the survey. Asset-based investment expenses generally include three basic components:
• investment management fees, which are paid to the investment’s portfolio managers;
• distribution and/or service fees (in the case of mutual funds, these include 12b-1 fees); and
• other fees of the investment option, including fees to cover custodial, legal, transfer agent (in the case of mutual funds), recordkeeping, and other operating expenses.

The report noted that portions of the distribution and/or service fees and other fees might be used to compensate the financial professional (e.g. individual broker or investment management firm) for the services provided to the plan and its participants and to offset recordkeeping and administration costs.

Roughly a quarter of the fees (23%) were attributed to separately charged recordkeeping/administrative fees. Those recordkeeping services are performed by a variety of service providers, including mutual fund companies, insurance companies, banks, or third-party administrators (TPAs). Recordkeeping services include posting payroll contributions, plan payments, earnings and adjustments; plan and participant servicing and communications; compliance testing and other regulatory requirements; and educational materials and services.

With respect to some activities, plan sponsors obviously might select varying degrees of recordkeeping service options. For example, among survey respondents 75% held group employee meetings, 22% offered individual employee meetings, and 19% offered both. More than one-third (36%) of responding plans had financial advice/guidance through third-party software available for their participants. While nearly all (91% of plans) procured enrollment kits through their retirement service provider, about two-thirds (69% of plans) arranged for participant newsletters and/or videos. Recordkeeping services for surveyed plans were delivered by 31 different retirement service providers.

Tenure, Relationships

In general, the relationships between the retirement service provider and plan sponsor in the survey averaged eight years. That was in-line with the 2008 Deloitte 401(k) Benchmarking Survey of 436 employers, where the average tenure was seven years. Across plan sizes, a majority (68%) of provider relationships have existed for five years or longer.

Nearly two-thirds (65%) of plans in the study did not have any other relationships with their retirement service provider, such as defined benefit plan, health and welfare plan, payroll, human resource or banking services. However, while such secondary relationships were not prevalent in the study, 77% of respondents indicated the plan utilizes one or more of the recordkeeper’s proprietary investments among investment options offered in the plan. Among respondents with proprietary investments offered, 95% of plans had a mix of proprietary and non-proprietary investments and only 5% of Survey participants exclusively had proprietary investment options in their line-ups.

Plan Designs

In terms of participant contributions, the average rate was 6.4%, and more than half (53%) of plans reported average participant contribution rates between 6% and 10%. Among respondent plans, 92% had employer contributions, typically in the form of a match formula. Many (34% of plans) matched at least 100% up to at least 3% of pay, often then matching at 100% or a lower rate additional employee contributions. Another 18% of plans matched 50 cents on the dollar (i.e., 50%) up to 6% of pay.

The most common plan design feature was auto-enrollment, with 45% of plans offering this component. Of those plans with auto-enrollment, 71% default to a lifecycle target-date investment option with an average default contribution rate of 3%. Automatic step-up or increase is a less utilized plan design feature; 25% of all plans in the survey had automatic step-up or increase.

In terms of complexity, 42% of plans indicated they have more than 20 business locations while 24% reported one. The Survey also found that 49% of plan sponsors process only one payroll and of those, 95% submit their payroll electronically.

The survey did not evaluate quality or value of services provided—both of which can impact fees. Quality of service varies with respect to the range of planning and guidance tools available to the plan sponsor and participants; educational materials; employee meetings; and other components of customer service. According to the survey’s authors, “qualitative differences in services may affect fees but are not easily quantified and are not addressed in this report”.

The full report is available here http://www.ici.org/pdf/rpt_09_dc_401k_fee_study.pdf