Small Businesses in the Dark

A new survey indicates that small businesses are paying too much on 401(k) plan fees. While most small businesses will not seek out a consultant to analyze their fees, the survey also reveals that, if an adviser can show them that they pay more than necessary, he may be able to win their business.

A national survey by ShareBuilder 401k found that, on average, owners of small businesses—i.e., with 100 or fewer employees—who read fee disclosure statements still consider 3% a reasonable price to pay. Three percent is three times ShareBuilder 401k’s 1% benchmark.

The survey findings also reveal that 62% of small-business owners think fee disclosures are clearer now than they were in 2012, the first year the Department of Labor (DOL) mandated that retirement plan providers disclose all administrative and investment fees. A majority (70%) of small-business owners who review their fee disclosures have felt prompted to comparison shop. Twenty-nine percent say they plan to look for a new retirement plan provider.

Further, employers are taking action on their own. Fewer small-business owners (23%) are likely to hire a consultant now compared with last year (37%). Rather, companies are negotiating or planning to negotiate better pricing with their current 401(k) provider (35%) and gathering or planning to gather benchmarking data to compare with alternate plans (34%). Sixty-five percent of small-business owners compared the fees in their plan against those of other similar plans on the market.

Yet, the survey also indicates that 86% of small-business owners are willing to spend more on their plan in return for increased support for the plan and for their employees. This includes access to investment advisers (37%) and employee guidance tools and materials (35%). So, the survey suggests that if an adviser can stress the importance of paying reasonable fees and show how he can strengthen the plan and participants’ results, his firm may be able to win more small-business accounts.

“While it’s encouraging to see that plan sponsors find the new disclosures easier to understand, and feel compelled to take action, there remains a lack of awareness regarding what is a reasonable price to pay,” says Stuart Robertson, president of ShareBuilder 401k in Seattle. This is where advisers can step in. “It is essential [that advisers] educate owners and employees on the low-fee options available.”

 “The more knowledgeable that owners and employees are about fees and their impact on savings, the closer they’ll be to attaining financial freedom in retirement,” Robertson says. “Over the course of a 30- or 40-year career, the difference between 1% or 2% in fees can translate into hundreds of thousands of dollars in lost retirement savings.”

Employees are taking a stand. Eighty-two percent of businesses reported that at least some of their workers took action as a result of their 401(k) fee disclosure notice. The survey also revealed that 41% of business owners received requests from their employees for a better understanding of their plan expenses.

Meanwhile, fees are on the decline, making it even more important that advisers help their small-plan clients realize what they should be paying for their retirement plan. In 2013, costs for small retirement plans decreased, while those for larger plans remained flat. According to the 14th edition of the “401k Averages Book,” the average total plan cost for a small retirement plan—one with 50 participants and $2.5 million in assets—declined from 1.46% to 1.44%. At the same time, the average total plan cost for a large retirement plan—one with 1,000 participants and $50 million in assets—remained flat at 1.03%.

“In most of our fee benchmark scenarios, we saw a decline in total plan costs and investment fees on a year-over-year basis,” says David Huntley, co-author of the book, who is based in Baltimore. Research shows that the small-plan average investment expense dropped from 1.37% to 1.35%, while the large-plan average investment expense bumped up slightly from 1% to 1.01%. “In cases where it stayed flat or ticked up, the increase in equity exposure in our allocation model was typically the reason,” Huntley says.

“The effects of fee disclosure and competitive pricing narrowed the range of the middle 50% of the product universe for most of the benchmark universes,” says Joseph Valletta, another of the book’s co-authors. “The small-retirement-plan universe saw the range of the middle 50% shrink from 36 basis points [BPS] last year to 29 basis points this year, while the large-plan variance went from 21 basis points to 20 basis points.”

Valletta adds: “With so many small employers either sponsoring or starting 401(k) plans, we also released a new set of benchmarks for plans with 10 participants [also known as micro plans]. One benchmark assumes plan assets of $500,000, while the other is $100,000.” The research finds that the average total plan expense for a 10-participant plan with $500,000 in assets is 1.90%. —Kevin McGuinness  

DOL Challenges Fee Ruling

Says Hancock is a fiduciary

Secretary of Labor Thomas E. Perez has filed a federal court brief disputing a district court’s dismissal of John Hancock’s liability in an excessive fee case.

In an amicus curiae brief in the 3rd U.S. Circuit Court of Appeals, regarding the case Santomenno v. John Hancock, Perez said that a district court in New Jersey was wrong to find John Hancock was not a fiduciary under the Employee Retirement Income Security Act (ERISA). The brief notes that Section 3(21)(A) of ERISA broadly defines “fiduciary” to confer fiduciary status regarding a plan on any person who “exercises any discretionary authority or discretionary control respecting management of such plan or … of its assets … or administration.”

The brief points to plaintiffs’ allegations that John Hancock exercised “discretionary authority or discretionary control” over plan management, regularly monitored the retirement plans and had the authority to unilaterally delete and substitute any or all funds through two formally established programs. The plaintiffs also alleged that John Hancock charged excessive fees, improperly received revenue-sharing payments and improperly selected the JHT-Money Market Trust as an investment option.

Perez argues that because John Hancock could exercise this power without permission from the plans, the plan trustees ultimately lacked control over whether the options they selected from John Hancock’s larger menu remained in the plans or whether those options would be replaced with other funds. John Hancock also had the discretion to change the share classes in which the plan participants’ retirement savings were invested.

—Rebecca Moore