Deloitte Defined Contribution / 401(k) Fee Study

"Inside the Structure of Defined Contribution / 401(k) Plan Fees: A Study Assessing the Mechanics of What Drives the 'All-In' Fee

...Whether required by law or deemed necessary to run a plan, there are fixed costs for operating any plan. These costs include plan accounting and audit, legal advice (such as plan document services), plan compliance testing and basic set-up costs. While there are some variable components to these costs as the plans become larger and more complicated, these necessary/fixed aspects are required for all plans...

...the services required by a plan are relatively consistent across the market. For example, defined contribution plans generally require compliance (to make sure the plan is administered properly), audit, Form 5500, and trustee services. In addition, recordkeeping, which maintains participants’ accounts and processes participants’ transactions, often also includes educational services, materials and communications. However, the Study found there to be variation on how fees are charged for defined contribution plan services.

Recordkeeping and administrative services can be charged directly to the plan or participant or can be assessed as an asset-based fee.

Also, a portion of the expense ratio of an investment option can be used to cover some of the recordkeeping and administrative costs. 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.

...The 'all-in' fee incorporates all administration, recordkeeping and investment fees whether assessed at a plan level, participant level or as an asset-based fee, across all multiple parties providing services to the plan.

...Totaling all administration, recordkeeping and investment fees, the median ‘all-in’ fee for the plans in the Survey was 0.72% of assets or approximately $350 per participant for a participant with an account balance of $48,522 (the median participant average account balance among plans in this Survey).

...The 'all-in' fee varied widely due to a number of plan related variables. However, total plan assets appeared to be the most significant driver of fees. With that said, further analysis shows that a more meaningful way to view plan asset size is through two independent factors:

Number of participants and Average account balance.

The number of participants and the average account balance are both negatively correlated with the 'all-in' fee. More participants and higher average account balances both tended to be associated with lower fees as a percentage of assets.

...This Study created an analytical bottom-line measure—an 'all-in' fee—to compare total plan costs across the varied pricing practices (per-plan fees, per-participant fees, asset-based fees) used in defined contribution / 401(k) plans.

...The primary drivers of fees are average account balance and number of participants, which combined, represent plan size.

...Defined contribution / 401(k) plans have fixed administrative costs necessary to run a plan that tend to cause smaller plans to have higher relative fees as a percentage of assets or per participant.

...The plan sponsor will determine who pays the fee (employer or participant) and how it is assessed. Payment for administrative services is generally handled through one or more of the following methods:

Dollar per participant fees that are paid for by the • employer, participant or both;

Dollar per plan fees that are paid by the employer, • participant or both;

Asset-based fees (based on a percentage of plan or • investment assets) that are paid for by the employer, participant or both;

...Within defined contribution / 401(k) plans, the manager of an investment option may agree to pay a portion of its investment fee to a service provider (in the case of 401(k) plans, generally the recordkeeper). The amount (often referred to as revenue sharing) is used to help offset the cost of the administrative services which would otherwise be charged directly to the plans and/or participants. The investment providers' payment to the recordkeeper helps cover the costs of recordkeeping multiple accounts...

...When plans use proprietary investment options—that is the investment provider is affiliated with the plan’s recordkeeper—some of those asset-based investment fees can be used to cover administrative services.

...Viewing fees from an 'all-in' fee perspective addresses the range of varying structures and arrangements for service payments due to 1) different service delivery mechanisms and associated fees and 2) per plan, per participant and asset-based fee types. By rolling all services and fee types into an 'all-in' fee, the data can be analyzed more consistently across plans and within segments to compare and discern different fee levels.

...Administration, recordkeeping, communication and education; Per participant, per plan, or asset-based fees used to pay for recordkeeping, plan and participant servicing, communications, education, compliance testing, Form 5500, plan audit, legal and trustee services.

...For this Survey, the 'all-in' fee was analyzed in two ways, as a percentage of plan assets and as an annual per-participant dollar amount.

...The dependent variable (fees) was assessed in two different methods or calculations of the 'all-in' fee: 1) the 'all-in' fee as a percentage of assets, and 2) annual dollar per-participant fee."


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