Sponsors Consider Fee Negotiation

A new survey found that in addition to reducing 401(k) contributions, employers are looking to cut cost by negotiating fees with their providers or advisers.

Diversified Investment Advisors’ “Report on Retirement Plans—2009,” a survey of corporations with 1,000 or more employees, found that 46% of plan sponsors are planning to reduce or eliminate employer contributions to their 401(k) plans or have already done so; however, the survey also revealed that the cash balance and 401(a) plan offerings are on the rise.

“We found that those employers that offer a defined benefit plan, as well as those with fewer than 10,000 employees, were most likely to eliminate the employer contribution to their 401(k) plan. In fact, most of the plan sponsors surveyed maintain multiple plans, so employers are still contributing to their employees’ retirement in other ways. For example, 46% of 401(k) plan sponsors surveyed also offer a 401(a) plan, 87% have a traditional pension plan, and 51% offer a cash balance plan,” said Diversified Vice President Laura White.

Of those employers that still contribute to their 401(k) plan, more than 90% funded their plan in part with employer contributions, with the majority relying on matching contributions (78%) as opposed to a stated percentage of salary (41%) or a fixed amount (16%).

Among those that plan to reduce benefits costs in 2009, 37% of plan sponsors said they were more likely to negotiate fees with the provider; 33% will negotiate fees with their adviser; 32% will change the way expenses are paid, presumably by transferring a greater share of the burden to employees; and only 17% said they had planned to reduce their employer contributions to their defined contribution plan.

White said the study also showed that four in 10 plan sponsors with $10 to $25 million in defined contribution plan assets expect to conduct a due diligence search in 2009 to ensure they are receiving a good value.

401(k)s Simplified

The report indicates that as 401(k) plans are becoming the predominant employer-sponsored retirement vehicle for employees, sponsors are trying to make them simpler.

According to a release from Diversified, nearly two-thirds of employers surveyed have implemented automatic enrollment. Plans with automatic enrollment tend to have a higher incidence of other account management features such as automatic deferral increases (60%), automatic rebalancing (52%), managed accounts (60%), and investment advice (65%).

Target-date funds have grown in popularity with 55% of 401(k) plans offering these funds versus 37% of plans in 2007. An additional 29% of plan sponsors said they plan to introduce them within the next 24 months.

In addition, 401(k) plans are offering fewer funds than in the past.  The number of 401(k) plans that offer five or fewer funds has risen to 33% in 2009 from 18% in 2007, while the incidence of plans that offer 10 to 14 funds has dropped to 15% today from 22% in 2007, Diversified said.

However, despite offering fewer funds, plan sponsors are offering access to more diversified investments: 41% of 401(k) plan sponsors with 1,000 or more employees now offer collective trusts, up from 25% in 2007; 54% offer exchange-traded funds; 42% offer inflation-protected securities; and 41% offer real estate investment trusts.

Forty percent of plan sponsors disclose total fees, while 59% disclose investment management fees, 58% disclose general administrative fees, and 47% disclose individual service fees. The majority (75%) disclose fees in participant statements.

Forty-four percent of plan sponsors said they plan to conduct an education campaign to help employees closer to retirement make retirement income decisions in 2009.

Sponsors are also trying to simplify things for themselves. Diversified found there is an increasing focus on outsourcing functions related to fiduciary responsibility; only 15% of corporate employers with 1,000 or more employees rely on internal staff to research and monitor investment options.

Forty-four percent of 401(k) plans have participation rates above 80%, compared to 28% of plans just three years ago. According to Diversified's survey, employee participation rates are 8% higher among employers that have implemented automatic enrollment than among those that have not. Target-date funds may also increase participation rates as the survey found 66% of plans with target-date funds experience participation rates of 70% or more, compared to 43% of plans without them.

The survey was conducted by Diversified and administered by EACH Enterprise, LLC, among U.S. companies with at least 1,000 employees. The survey featured responses from 279 individuals responsible for the administration of retirement benefits in their companies.

A copy of the report is available by e-mailing retirementresearchcouncil@divinvest.com.