PLANSPONSOR - August/September 2019 - 28

DC Recordkeeping:
The High Cost of Low Fees
Recordkeepers
S
ponsors of defined contribution
(DC) retirement plans have been
on a multi-year mission to reduce
costs, both in fees for investment
management and plan administration.
And with apparent success: For recordkeeping
in particular, surveys report
that pressure from sponsors and
advisers, as well as competition in the
market, have reduced per-participant
costs by about half,
in dollar
terms,
over the last dozen years.
But sponsors need to look beyond the
published fee rates, as recordkeepers
take measures to subsidize lower
recordkeeping fees through investment
products and other indirect routes. They
also need to be alert to reduced levels of
service, as recordkeepers automate and
offshore their operations.
PLANSPONSOR met with Ted Schmelzle,
Senior Director of Plan Sponsor Services,
and Kent Peterson, Chief Financial Officer, both of Securian
Financial Retirement Solutions, to discuss the evolution of the
recordkeeping marketplace, and the questions sponsors and
their advisers need to ask for a full measure of the quality and
cost of services their recordkeepers are providing.
PLANSPONSOR: For years there have been moves to cut
costs from all variables in the DC equation. Has the total
effective cost really gone down that much, and what has
been the benefit to sponsors and participants?
Kent Peterson: It's hard to find a place where there isn't fee
compression in the retirement space-with asset managers,
recordkeepers, and the advisers that support plans. Sponsors
have been looking to pay lower
fees, and providers have
promised that they would deliver the same service at a lower
price point. In many instances that helped to wring a lot of
inefficiencies from recordkeeping.
But that may have run its course. In the conversations we have
with sponsors and advisers, of course they think it's great to
have lower fees, but there's also significant frustration with
deterioration in service. That means sponsors and advisers
have to work harder to make up for the reduced service,
SPONSORED SECTION
are calling their
services more
efficient, or
streamlined,
but that may
be a kind way
of saying " less
service. "
Ted
Schmelzle: In
and in the end it's just shifting the
costs, rather than creating a true
net saving. We've just published a
white paper, Fee compression isn't
free, that discusses the challenges,
and suggests a list of questions for
advisers and sponsors to aid in their
due diligence: www.securian.com/
FeeCompression.
some
cases,
those cost savings morphed from
compression of fees into subsidization,
where recordkeepers are
using ancillary revenue streams to
make up for loss-leaders services in
plan administration.
PS: The structure of DC plan
services
is
awfully
complex-
how can sponsors get a
reasonably accurate view of the
true cost they are paying, and
what it is they are paying for?
Schmelzle: Let's start with the requirements placed on
sponsors under ERISA. They have to look at what they spend,
and make a determination that the cost is reasonable relative to
the services provided. If the recordkeeper is subsidizing the cost
of those services with some other revenue, it can be impossible
for the sponsor to know the true cost of what they're getting.
Peterson: Sponsors need to know what
they are explicitly
paying, but they also need to know of any conflicts of interest
for the service provider. Unfortunately the subsidies can take
many forms. The provider can be guiding sponsors to use their
stable value funds, or adopt their in-house target date fund
series, which may not be the best values. Revenue sharing
through 12(b)-1 fees is still prevalent, too. More recently, a few
recordkeepers have established so-called pay-to-play platforms,
where they charge a fee to mutual fund companies to be part
of a select list of investment options they offer to sponsors.
And the smaller the plan, the more likely it is that sponsors are
being talked into one of these more rigid investments that the
recordkeeper claims are low cost, but in fact only appear to be,
because they are hiding the true cost in some other element.
Beyond that, some providers aggressively mine data on participants
leaving a company, to drive them to their IRA products.
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PLANSPONSOR - August/September 2019

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