Plan sponsors, still feeling the pressure of the Department of Labor’s six-year-old fee disclosure rules and the threat of fee-related litigation, are continuing to place 401(k) fees under the microscope.

According to the “2018 Defined Contribution Trends Survey” from Callan, a consulting firm, 83% of plan sponsors calculated fees within the last year, 41% reduced their fees as a result of their fee review, and 60% are somewhat or very likely to conduct a fee study in 2018. Although reining in fees should be a good thing, it can’t be the end game and even modest fee trimming requires care.

Plan sponsors who skimp on investment management, plan administration, fiduciary services, participant education or other plan-related services may put themselves and their employees at risk.

“One of the dilemmas in the industry could be too much focus on fees and not really focus on the benefits of making the right investment decisions,” says David Musto, president of Dresher, Pa.-based Ascensus, which administers more than 43,000 401(k) plans and has over $64.8 billion in 401(k) assets under administration. “The first mistake is looking at fees without looking at performance net of fees,” he says, noting that some categories of investments lend themselves better to index investing.

Historically, fixed income, emerging markets and less liquid asset classes including real estate and commodities haven’t been indexed as readily, he says.

A second common mistake, says Musto, is looking only at fees and ignoring the benefits of greater diversification and risk control. This becomes particularly important as individuals transition to retirement and face risks related to the sequence of returns, he says. Advisors offering fiduciary services for 401(k) plans should talk to plan sponsor clients about the costs and capabilities they’re bringing, says Musto—and there’s no time to waste.

More than half of plan sponsors (53%) responding to a 2017 survey from analytics firm Cerulli Associates indicated they expected to look for a new advisor or consultant in the next 12 months. When asked why (they could select multiple reasons) 32.6% said that their advisor/consultant service costs were too high, 35.8% said they were interested in switching to an advisor or consultant who was willing to act as a fiduciary for their plans, and 37.4% said that the plan investments recommended by their current advisor had underperformed.

“You need to find a sweet spot in terms of your delivery capability,” says Musto. “So you can grow your practice without sacrificing in any way the service you’re delivering to your clients.”

Meanwhile, Musto sees a number of factors continuing to drive down 401(k) fees, including a competitive marketplace, growing client awareness about fees, sharper value propositions from advisors, an increase in the quality and volume of reporting of plan outcomes, and an industry shift toward fee-based plans and low-cost investments.

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