A Need to Show Value

But, more recently, Dall has seen plan sponsors pay increasing attention to understanding the fees they pay for their defined contribution and defined benefit plans and asking how that cost might be reduced. “They’re looking at things such as proprietary funds and what distribution fees go to the managers on their plan,” he says. 

And they know that the adviser’s fee is part of the equation. “Is the adviser making additional compensation based on investments he puts in the investment menu, and is that influencing [his] decision?” Dall continues.

Further, in light of the industry’s consolidation, sponsors are evaluating recordkeeping fees. Some clients ask PNC to perform a recordkeeper search, with the resulting savings of moving to a new provider being up to 50%. Prospective clients also want greater fee disclosure than they did pre-pandemic, Dall says. “Every request for proposals we’ve seen in the past year has included a question regarding a breakdown of fees and compensation we’ll receive related to servicing the plan.”

“Retirement Planscape,” a survey report released in June by market research firm Escalent, supports Dall’s observations when it comes to DC plans. “When we asked plan sponsors to rank the three aspects of their organization’s 401(k) plan that will receive the most focus during the coming year, we found that overall cost reduction is a universal endeavor across every plan size,” says Sonia Davis, the report’s lead author and a senior product director at Escalent, in Livonia, Michigan. 

In prior Escalent surveys, DC plans with less than $5 million in assets were the most apt to cite cost reduction as a top goal, but now large plans share that concern. Fifty percent of large- and mega-plan sponsors say addressing plan costs is a priority for the coming year, up from 35% in 2021. According to Davis, plan cost reduction nets one-quarter of first-ranked mentions in the 2023 survey.

Justifying Advisory Fees

None of the advisers interviewed for this story reported unusual pressure from sponsor clients to reduce their advisory fees. However, they did cite an increased need to demonstrate how they add value to the plan. “It’s all about the justification of fees” of vendors in plan management, Davis says. Still, she adds, Escalent sees “usage of advisers remaining quite strong, if not growing or expanding, in this current environment.” 

Advisers point to multiple services to justify fees. Loraine Montanye, senior retirement plan adviser with advisory firm DBR & Co. in Pittsburgh, says her firm’s most significant value-add is its skill at reducing or taking on liability that sponsors would otherwise retain.

“There’s a huge liability associated with sponsoring a retirement plan, based on the quality and expertise of service providers [the sponsor] hires,” Montanye says. DBR & Co. serves as both a 3(38) and a 3(21) fiduciary. While, “as a 3(38), we’re liable for the plan’s investment selections, in our 3(21) co-fiduciary service, we share liability with the sponsor through our responsibility to provide high-quality advice,” she says.

Adam Dani, a retirement plan specialist with Napier Financial in Braintree, Massachusetts, says he spends much of his time in two areas. The first is helping sponsors work with the multiple service providers supporting the plan. He says a small-business owner has little time to deal with recordkeepers and third-party administrators. Napier Financial provides a primary point of contact for interacting with the vendors, saving the sponsor time and aggravation. The second area is providing financial education to employees. Dani says participants want education and advice. “Being the education specialist is what stands us apart for our clients.”

Advisers to defined benefit plans also can justify fees by adding value. According to Martha Tejera, search consultant with Tejera & Associates LLC, in Tucson, Arizona, performing strategic asset-allocation studies is the most significant benefit an adviser can offer. The studies can include assessing the client’s return-seeking strategies, reviewing liability-hedging strategies such as liability-driven investing, developing the plan’s glide path and performing pension risk transfers.

Cost-Cutting Measures

Identifying potential cost savings is another way advisers can add value and reframe the conversation, says Rakesh Mahajan, chief revenue officer at automated-401(k) and -403(b) provider Human Interest in San Francisco. His firm supplies a free plan benchmarking service for customers and prospects.

As part of that service, Human Interest has a team dedicated to reviewing a plan’s 408(b)(2) fee disclosure statements to show sponsors what fees they are paying. Mahajan notes that sponsors often need more knowledge to be able to identify all the expenses they pay and are often surprised by their plan’s costs. 

Dall points to the difficulty for plan sponsors to analyze cost data internally. “An adviser team such as ours can get into the details, pull the fee disclosures and compare share classes,” Dall says. “A plan sponsor on its own might not have access to the data, or might not understand the data in terms of being able to benchmark its fees, especially in cases where it’s given formulas or conflicting documents.”

Fee analyses can sometimes generate substantial savings. Dall mentions PNC’s review of a new client’s $16 million plan in a revenue-sharing platform where the plan paid fees to an adviser and the recordkeeper. After reviewing the plan’s investments, organization, and workforce demographics, Dall’s team recommended a shift to an open architecture platform with the same recordkeeper. The recordkeeper subsequently lowered its fees because of the change from revenue-sharing to zero-revenue funds. The result: nearly a $100,000 reduction in the plan’s annual costs while retaining “relatively the same investments with the same types, same mix of active and passive,” Dall says.

401(k) plans’ investment-related average fees have been dropping in recent years, according to the “401k Averages Book” annual survey. 

But Beth Halberstadt, senior partner in Aon’s wealth solutions practice, in Boston, explains that Aon utilizes its large DC-plan clients’ buying power to negotiate lower rates with investment managers. Pooling Aon’s outsourced chief investment officers’ assets can also help it lower fees because OCIOs reduce an investment manager’s distribution costs and bring substantial assets to the manager. “So, the investment management firms have been willing to give OCIOs reduced fees for their clients,” Halberstadt says. 

A growing number of sponsors are debating switching to a digital plan provider and recordkeeper, according to Escalent’s Planscape survey: 43% of respondents said lower fees and better cost structures were their main reasons. Other motivations were better digital capabilities, easier participant onboarding, and payroll integration. “We began tracking digital recordkeepers in last year’s study, and, since then, five firms have increased their overall brand awareness,” Davis says. “They are gaining more recognition in the marketplace.”

For smaller plans, there are additional steps they can consider, Dani says. Among his suggestions:

• Recommend the sponsor use a provider-platform’s 3(38) option to analyze funds; this frees your time to help participants and work with the sponsor to monitor service providers.
• Ensure the payroll provider and recordkeeper have a high-quality integration, to save the payroll department time. 
• Use the Social Security Administration’s determination of disability to save time and money in disability claims. 
• Work with a 3(16) service to ensure accurate and timely plan administration; this helps prevent plan sponsor errors and the potential for penalties.

Modify Plan Design

A pooled employer plan or a multiple employer plan could also provide cost savings. Dani says several chambers of commerce and trade associations now offer these to member organizations, and the plans’ availability is increasing. 

Montanye explains that DBR & Co. is the lead sponsor on a MEP, and the firm “has found that that’s a great solution for small employers and startups.”

Startup plans lack assets and buying-power in the market, she says. They do not receive the most competitive rates for recordkeeping, administration and some investment strategies’ lowest-cost share classes. Pooling their assets can lead to lower costs.

Some possible plan design changes will need to be clarified or aligned with the company’s goals and culture. Still, the adviser can help the client determine what may work for its plan, says Blade Zych, a retirement plan consultant with OneDigital Retirement Plan Services in Atlanta. One option could be to cap the company match, allowing an employer to predict the match cost.

Another possibility is a three-year cliff vesting schedule instead of a longer-term graded schedule. For example, a plan with a five-year graded schedule at 20% per year would recapture only 60% of the match dollars if an employee leaves with two years of vesting credits, Zych says. They would recapture 100% of the match dollars with a three-year cliff. “With the majority of turnover occurring within the first three years, this schedule will help the company retain those match dollars; the company can then use them to offset plan expenses or future matching contributions,” he explains.

Rob Reiskytl, a partner in Aon’s wealth solutions practice in Minneapolis, suggests advisers recommend multiple small design tweaks by which the client can lessen costs. These might include delaying the timing of the DC plan allocation to the end of each quarter or year; requiring employment on the last day of the plan year to be eligible for some or all of the annual DC allocation; or reducing or eliminating early retirement subsidies for new DB plan accruals.

Still, have plan sponsors keep in mind that it is easier to expand employee benefits than to reduce them, Montanye cautions. Participants might resist such changes. “When you’re talking employer contributions, vesting, what employees get out of the plan, that is their benefit; that’s part of their compensation package,” she says. “Reducing that will be a very unpopular decision among employees because it essentially is less financial benefit to them.”