Guest Column: Keeping retirement plan costs from spiraling out of control

Home Columns Guest Column: Keeping retirement plan costs from spiraling out of control

Jan 18/25; Volume 30/Number 15

By Fred Levine

Floor covering retailers and manufacturers spend the better part of their days focusing on one thing: maximizing profitability. There are two components of this: increasing revenue and decreasing expenses. Most companies focus on growing the bottom line by increasing sales, particularly in a robust economy. But what if there was an expense leak that was negatively impacting the bottom line? Surely this would be rectified—provided the company knew the leak existed.

Many companies have retirement plans for their employees. This could be a 401(k) plan, profit sharing or defined benefits. Companies offer these plans as a way to not only retain loyalty but also to attract top talent. Some companies will even go so far as to match the employee’s contribution as an added bonus.

Many smart companies solicit the services of a financial adviser or consultant to ensure the plan’s expenses are deemed reasonable. These can include investment expenses, record keeping and general administrative costs. If these expenses are not controlled the plan can be inefficient and underperform. We have seen plans with expenses greater than 2% of the current balance per participant to the service provider, which can be mutual fund companies or insurance companies. Typically, it is better to go with a mutual fund company because investment expenses are lower.

We have found that nine times out of 10, companies have no idea what their fees are. And sometimes these fees are exorbitant. Certain fees are unnecessary given the size and scope of the plan. The result is that companies can lose a lot of money because the money is not going back into the participants’ pockets.

Whether you are a manufacturer or large retailer, it behooves you to have your plan analyzed to ensure maximum efficiency. In fact, the Department of Labor has mandated that even if you have an exemplary relationship with your adviser or service provider, it is your fiduciary responsibility to benchmark your company’s retirement plan for fees and expenses every three years. You owe it to the participants in the plan.

Luckily, there are companies that can help. They assist in controlling plan expenses, which is the most important duty of the fiduciary. Basically, we try to build a better mousetrap. We try to make the plan more efficient so the participants can meet their retirement goals.

How do you make a plan more efficient? In our case, the first thing we do is analyze the current plan at no cost to the company. Specifically, we look at Forms 408(b)(2) and 404(a)(5), which will detail the plan and participant expenses, respectively. Once we see the plan’s expenses and investment lineup, we then seek out two or three other vendors to compare based on the number of participants and current balance of the plan. The idea is to make the plan less expensive and more effective. Once we complete the analysis, we find an investment platform that is more diversified and less expensive—then we make a presentation. For example, we may look at the current lineup and see the company is paying 1.5% in expenses. With extensive due diligence we can probably get that below 1% with a better investment lineup.

We recently analyzed a $30 million plan whose average plan expense was 1.85%. We came back to the company at 1.05%. That translates into a savings of $24,000 a year. And that amount grows exponentially year over year as the value of the plan increases.

Why do expenses vary so greatly? There are different models: revenue sharing plans, the plain vanilla mutual find lineup, where expenses go directly to the mutual fund company on top of expenses you pay to the plan provider and adviser. So there are three components of the expense. In the non-revenue sharing plan, there are no expenses paid to the mutual fund company. You pay one fee across the board. It doesn’t matter what asset class you are in. By using revenue sharing, you are on the same side of the table as the participants; we are working for you. In the non-revenue sharing model you pick any mutual fund family from any asset class and you are charged an institutional share class. The expenses would be 15 basis points (.15%). In other words, any mutual fund you would pick would cost $15 per $100. On the revenue sharing side, depending on the mutual fund, you could pay more than $100 in expenses per $100 invested.

Plans should grow exponentially year over year, whether it be 2% or 12%. The goal of most plans is to try to beat the benchmark, which is typically the S&P 500. Every year will not be a home run. But minimizing expenses will go a long way in maximizing the return on a retirement plan investment.

 

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