Negotiating fees in a 401K Plan

[Ready]

I am currently in the process of receiving bids for record keeping and advisory services for our company's 401K plan. So far I've received proposals from Wells Fargo and Fidelity/Morgan Stanley.

The record keeping fees have been quoted for between 14-19 bps, and the advisory services are 25 bps. I'm told that advisory services are not mandatory, but if we don't elect them, our company would be required to answer investment questions, and bear the liability of being sued if an employee feels they got bad advice.

So I have three questions:

1) Can I find a better solution for advisory fees than paying 25 bps? Does anyone charge either a flat fee, or hourly, for their services?

2) Is it risky to eliminate the advisor and go in house, and just select a variety of index funds to keep the investment selections very "safe"?

3) Does anyone have any recommendations beyond Fidelity/Wells/Vanguard?

We have Vanguard index funds in the plan now, and the thought of having to pay 45 bps on top of the index fund expense ratios is pretty unappealing, but I'm wondering if that's just part of the inefficiencies associated with managing a 401K plan.

The company has about $12M in assets in the plan, and 160 active participants, if that makes any difference.

If anyone has any insights they could share, it would be greatly appreciated.

 

[meierlde]

I am currently in the process of receiving bids for record keeping and advisory services for our company's 401K plan. So far I've received proposals from Wells Fargo and Fidelity/Morgan Stanley.

The record keeping fees have been quoted for between 14-19 bps, and the advisory services are 25 bps. I'm told that advisory services are not mandatory, but if we don't elect them, our company would be required to answer investment questions, and bear the liability of being sued if an employee feels they got bad advice.

So I have three questions:

1) Can I find a better solution for advisory fees than paying 25 bps? Does anyone charge either a flat fee, or hourly, for their services?

2) Is it risky to eliminate the advisor and go in house, and just select a variety of index funds to keep the investment selections very "safe"?

3) Does anyone have any recommendations beyond Fidelity/Wells/Vanguard?

We have Vanguard index funds in the plan now, and the thought of having to pay 45 bps on top of the index fund expense ratios is pretty unappealing, but I'm wondering if that's just part of the inefficiencies associated with managing a 401K plan.

The company has about $12M in assets in the plan, and 160 active participants, if that makes any difference.

If anyone has any insights they could share, it would be greatly appreciated.

At that size you don't have a lot of stroke, my megacorp 401k charges $30 per year as a flat fee with Vanguard. but it is also big enough to get access the the large funds Vanguard has such as the institutional index trust funds.

 

[Ready]

Thanks for the tip. I went back and asked the vendors to quote their fees as a fixed fee rather than a percentage of assets under management, and the fees dropped significantly.

Also interesting to learn is that the new Obama fiduciary rules have significantly changed how these plans are put together. They can no longer seek commissions by loading the plans with 12B-1 fees, so they are trying to make their money on the record keeping and advisory fees alone now. It's been a big hit to the industry on profit margins, but a significant benefit to retirement plan participants.

If anyone is currently in a 401K program that still has funds with 12B-1 fees, you should speak up and complain that these investments do not conform to the new fiduciary rules. There are plenty of articles on class action lawsuits over high fees and kickbacks.


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[LOL!]

At my previous employer, Fidelity was used for the 401(k) plan and also the payroll. The 401(k) cost was $15 per participant and another $3,000 fixed fee.

It is true that Fidelity made money from the fund expense ratios, too. However, there were index funds in the plan for those who wanted to use them with very low expense ratio. Fidelity made most of their money off the expense ratios of the actively-managed funds in the plan that most people chose.

Our plan was about 2 to 3 times the size of your plan.

I don't think you need advisory services, but could hire a fee-only CFP to give an all-hands seminar once a year if you wanted. If you have index funds there is no way you will be sued I think. Also Fidelity could send someone to spend one day a year giving such a lecture. You can negotiate this cost on a per visit basis.

bogleheads.org has lots of information on how to negotiate a better 401(k) plan.

https://www.bogleheads.org/wiki/Setting_up_a_401(k)_plan
https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan

 

[Ready]

Those are very low fees. I have not been able to get anything that competitive. I'm at $5,000 fixed, plus $59/participant. Advisory fees are $12,000 per year, and I have to pay 4 bps for Fidelity to be the custodian.

I calculate the per participant cost, assuming an average balance of $50K, to be around $190 all in. Plus whatever the expense ratios on the funds are, but those are the same regardless of who we go with, and we are not tied to using any particular brand of funds.

I'm thinking we go with advisory services for the first year, and then evaluate if we really need them on an ongoing basis. But eliminating them only reduces the per participant fee by $75/year, so it's really not all that much money we are talking about.

This also gives me the ability to offer a stable value fund, currently at a yield of 2.3%.

Thoughts?


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[LOL!]

I would look at Employer Fiduciary and others like that instead of mega-name firm. Such firms are listed in the bogleheads wiki.

My spouse's plan is switching to TDAmeritrade, so that's another name. Vanguard has plans and Ascensus, too. You only mentioned 3 firms (two of which must have outrageous fees), so that's not enough looking around.

Would it make sense to switch payroll functions to the 401(k) provider at the same time?

 

[Ready]

LOL! - thanks for the tip. I gave Employer Fiduciary a call and they gave me a quote very quickly.

It was a base price of $10,200 plus 8 bps, with no advisory services, so a bit higher than my current best proposal. Definitely worth checking though. I'm beginning to think I'm getting about as good as I'm going to get, or at least the time spent will have diminishing returns on any further research.