By Stephen Miller, CEBS, Society for Human Resource Management
Seek lower fees but keep available services in mind
Three financial management firms—American Funds, Empower Retirement and Voya—are giving Fidelity Investments and Vanguard a run for their money in the 401(k) market, a new study shows.
While Fidelity and Vanguard have historically dominated 401(k) plan record-keeping and administrative services—in both the number of plans they're managing and the percentage of new plans they're winning—challenger brands are gaining ground, according to a recentRetirement Planscape report by Market Strategies International, a market research and consulting firm based in Livonia, Mich.
Fidelity and Vanguard have enjoyed a comfortable lead over their key competitors for some time, the report noted. But among the trends cited this year:
- Voya and American Funds are closing in on the leaders in the micro-plan segment (plans with less than $5 million in assets).
- Empower Retirement rivals Fidelity and Vanguard for consideration in the midsize (plans with $20 million to less than $100 million in assets) and large segments (plans with $100 million to less than $500 million in assets).
"While the other firms are not as well-known, they've been building their brand presence over the years," said Linda York, senior vice president at Market Strategies and co-author of the report. "American Funds and Voya have successfully leveraged their advisor networks to reach the smaller plans, while Empower has made significant investments in its technology infrastructure to appeal to the larger end of the market."
These firms are challenging the two historical leaders by "executing a marketing strategy that plays to their strengths in their chosen segment," she noted.
The research also found that, when considering plan providers:
- Micro-plan sponsors look for value and companies they trust while small to medium plans seek superior choice and flexibility with investment options.
- Large and mega plans hone in on best-in-class participant service and support.
"The 401(k) market is not one-size-fits-all," said Julia Johnston-Ketterer, senior director at Market Strategies and co-author of the report. Lesser-known brands are monitoring the competitive landscape to identify untapped needs and further develop their brands, she noted.
[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]
Making a Switch
Twenty-six percent of plan sponsors expect to conduct a search for a new record-keeping firm in 2017, according to Callan Associates' 10th annual Defined Contribution (DC) Trends Survey, fielded in the fall of 2016. The Chicago-based investment consulting firm's survey included responses from 165 plan sponsors, primarily large and mega 401(k) plans.
In another finding, 3.4 percent of respondents said they expected to change record-keepers specifically in response to the Department of Labor's (DOL's) fiduciary rule, which began to take effect in June. The rule requires that investment advice provided to plan participants be in their best interest and be uninfluenced by fees paid to the advisor.
When considering a switch, keep in mind that a number of "discount" service providers have entered the 401(k) market in recent years, offering extremely low fees generally to smaller plans. Examples of these firms include For Us All, Employee Fiduciary and Betterment for Business.
"Any plan sponsor concerned about high fees or experiencing poor service—whether that be administrative errors, lack of responsiveness or missed deliverables/deadlines—can gather competitive data through a benchmarking study, a request for information (RFI) or a request for proposal (RFP)," said Monica Gallagher, a Jacksonville, Fla.-based partner in October Three Consulting, a retirement plan advisory firm.
Renegotiating plan fees with a current 401(k) services firm is an alternative to switching to a lower-fee provider.
"Plan sponsors should have the ability to negotiate lower fees once a plan's initial implementation expense has been recovered by the provider, typically three to five years," Gallagher said. She also advised "having a frank discussion with your provider about standardization and best practices. For example, are there any customized processes that were originally put in place that are no longer needed or no longer worth the incremental expense?"
According to the NEPC 2016 Defined Contribution Plan & Fee Survey, 81 percent of large 401(k) plan sponsors have renegotiated fees with their service providers since 2013, resulting in an almost 10 percent fee reduction from 2014 to 2015.
"The fact that plan fees are at their lowest level in a decade gets a lot of attention," said Ross Bremen, a partner and defined contribution strategist at Boston-based consultancy NEPC, which last year surveyed 117 large defined contribution plans representing 1.4 million plan participants.
He cautioned, however, that "while lower fees reflect the good work sponsors have done to reduce fees on participants' behalf, at some point service levels could suffer."
Bremen added, "A race to the bottom, at the risk of sacrificing service and innovation, is not in the participants' best interests."
The same advice holds true when considering a switch in service providers.