DC Plans Trying Harder to Rein in Runaway Fees
Pensions & Investments
Plan providers put under magnifying glass in effort to find, wring out unwanted excess
When it switches providers in December, Playtex Inc. will save $500,000 over the course of the contract in fees that had been paid by its 401(k) participants.
Julie Row, director of benefits at Westport, Conn.-based Playtex, said, "Our current vendor was making a lot of money off us on fees for investment management." Playtex has three qualified defined contribution plans in the United States and one in Puerto Rico, which total about $110 million.
At the $500 million City of San Diego Deferred Compensation Plan, its current provider, AIG VALIC, Houston, is doing a report on the administrative costs of running the plan, relative to the revenue it generates, according to Valerie Van Deweghe, benefits manager.
Ms. Van Deweghe said the plan expects the VALIC report by November. If there is a substantial difference between the costs paid and the revenue generated, she said, trustees will negotiate for lower the fees. San Diego’s contract with VALIC ends next year. Ms. Van Deweghe said the plan might decide to issue an RFP for a new provider if negotiations with VALIC over fees are unsuccessful.
Playtex worked with The Glading Group, Montclair, N.J., to assess revenue-sharing fees its participants were paying to its current provider, Boston-based Putnam Investments Inc., and negotiate lower fees with the new provider, New York Life Investment Management Inc., for its two-year contract.
Currently the Playtex 401(k) plans are paying 51 basis points in fees to Putnam. When it switches to NYLIM in December, the total fee will be 37 basis points. Previous relationship Ms. Row said Putnam was willing to cut its fees, but the overall package of bundled services offered by NYLIM, including the reduction in fees, was superior to what Putnam offered.
Ms. Row said the Glading Group had previously done consulting work for Playtex, and when company officials decided to look at fees, they wanted an independent consultant and believed Glading was the best for the project.
"Many providers are making excessive profits through revenue-sharing arrangements," said Brent Glading, managing director and founder of the eponymous firm. "We can determine how much it really costs to service a (DC) plan."
Mr. Glading cited the example of another unidentified 401(k) plan that has $2 billion in assets and 20,000 participants. His firm determined that the plan was generating $8 million in annual revenue for its provider, while the actual cost of running the plan was $2 million, he said. Mr. Glading pointed out that while the plan sponsor might not be paying any fees for administration of the plan, plan participants are the ones paying the investment management fees. "Everything is borne by the participants – if there’s an opportunity to recapture revenues, it should be done."
He also pointed out that it is the fiduciary duty of plan sponsors to make sure the plan pays the lowest fees possible. Mr. Glading thinks the next area of defined contribution plan litigation could very well be over excessive fees.
Source of lawsuits?
Ian Kopelman, head of employee benefits litigation at Piper Rudnick, Chicago, said, "To the extent that fees paid by the plan are passed through to plan participants, it is the fiduciary responsibility of whoever chooses the provider to make sure that the fees are not excessive." He declined to say whether the fees paid, if they are deemed excessive, could be a source of class-action lawsuits.
Mr. Glading said he recently got a call from attorneys with Bernstein Litowitz Berger & Grossman LLP, New York, which specializes in class-action lawsuits. They were exploring the possibility of suing defined contribution plan service providers over fees.
Doug McKeigh, a partner in Bernstein Litowitz, said, "When the trustees of defined contribution plans negotiate deals with service providers, they have to make sure that they know what the costs will be to plan participants and have to know they are not being overcharged for the services. Whether or not there will be class-action lawsuits arising out of this issue will depend on the circumstances of any given situation and whether or not there is an egregious situation showing that (DC plan) trustees are not doing their job."
Glading Group has worked with 25 companies with defined contribution plan assets ranging from $50 million to $2 billion. It is currently doing revenue sharing and fee analyses for 12 companies, which he wouldn’t identify.