K Plan Expenses Weigh on Plan Sponsor Minds

More than 70% of plan sponsors said they were concerned about the total cost of their 401(k) plan. Asked about steps they were taking to help reduced the cost, plan sponsors said they were evaluating investment management fees and taking advantage of institutional pricing, according to Hewitt Associates’ study of more than 140 employers with 1.9 million participating employees.

Sixty percent announced making or planning to make reductions in investment management fees, which Hewitt said make up 70% to 80% of a 401(k) plan’s cost. Pamela Hess, a defined contribution consultant at Hewitt, also said plan sponsors are examining these fees because of their ability to effect change. “They are also the most manageable and predictable costs to reduce, as employers typically have a number of funds to select from that meet their 401(k) plan needs. Employers can make relatively small changes in this area that can make a big difference in an employee’s ultimate accumulated wealth – often in the form of higher returns.”

Most plan sponsors though have the right idea about fund selection. Sixty percent said their 401(k) plan offers institutional funds was a way to reduce 401(k) plan costs. Additionally, 33% said they use the same provider for both their defined benefit and defined contribution plans, as a way to lower investment management fees even further – creating an economy of scale.

Querying Providers

The problem though is that a large portion of plan sponsors (49%) have not yet put pen-to-paper and evaluated their 401(k) plan’s total cost. To assist plan sponsors, Hess recommends going to the plan’s provider and requesting a breakdown of all fees associated with the plan – both explicit and implicit. The reason for the specific request, says Hess, is because trustee and administration costs are often “bundled” with investment management fees. However, plan sponsors need to know the true cost of these services, rather than believing they are being offered free of charge.

“Employers need to ask their 401(k) provider questions about total plan cost and make sure they understand the breakdown of administrative, trustee and investment management fees,” says Hess. “Doing so will enable employers to better maximize the returns on their employees’ 401(k) investments.”

Copies of the complete report,“Survey Findings: Defined Contribution Total Plan Cost 2004,” are available by contacting the Hewitt Information Desk at (847) 295-5000.