However, many employers also are working to cut investment fees. Many are conducting fee studies aimed at saving millions of dollars by replacing high expense open-end mutual funds with lower-cost ones, according to Workforce Management magazine. One plan sponsor, for example, brought in low-cost funds and ETFs from Vanguard and Barclays to replace three higher-cost funds. Akzon Nobel, a Chicago-based chemical company with $1.6 billion in plan assets, says it saved $31,000 by moving to a Vanguard Index fund, $67,000 by switching to a Vanguard money fund and $340,000, by moving to Barclays target date funds. Meanwhile, the plan sponsor also saved $120,000 by having Fidelity Investments waive quarterly fees, according to Workforce Management.
"A growing number of 401(k) plan executives are demanding to know how much in excess revenue is generated by their plans and how they can get their hands on that money to cut costs and enhance services to participants," the report says.
Exchange-traded funds providers also are slashing fees in 401 (k) plans. Among those: Vanguard, Fidelity, Barclays, and Charles Schwab. And employees who make recurrent investments or use a stable of funds to diversify pay no commissions. Investment companies, such as Wells Fargo, have reduced the fees on its target date funds when used in the retirement plans.
The uncertainty pervasive among 401(k) investors, however, spells attractive business opportunities for investment advisors. More advisors are doing business with plan sponsors as consultants or money managers. Employees who used professional advisors improved their savings rates and had appropriately diversified portfolios, according to a September 2010 study by Charles Schwab, a service provider for 1.5 million company retirement plan participants.
The Pension Protection Act of 2006 made it clear that registered investment advisors can participate in 401(k) plans and collect a fee. "Interim regulations that take effect next year will force plans to provide full transparency and full fee disclosure," adds Jonathan Bergman, the chief investment officer with Palisades Hudson Asset Management in Scarsdale, N.Y.
Recently, Bergman helped several area companies set up asset-allocation models and fee structures, using select Vanguard Target Maturity funds as a default option in their plans. "There is a market for it," Bergman says. "The time is right for as much education and diversification as possible."
Gerald Wernette, the director of retirement plan services with Rehmann, a financial services, accounting and consulting firm in Farmington Hills, Mich., says that he's talking to many plan sponsors about setting up highly diversified "collective funds." These funds, managed by fee-only investment advisors, are similar to bank-managed trust funds. They use a wide range of no-load mutual funds, low-cost exchange-traded funds and tactically managed asset-allocation mixes.
"We are having conversations [with plan sponsors] to bring alternative investments into their mix of assets," Wernette says.
Insurance companies also are making inroads into the 401(k) marketplace. It's been estimated by the Profit Sharing/401k Council in Chicago that fewer than one in five defined contribution plans offer annuity distribution options in their plans.
But things could change. The Obama administration is looking into the use of immediate annuities to help workers reduce longevity risk in their retirement savings plans. And as of this writing, Senate bill S. 2832 was under consideration by the Committee on Health, Education, Labor & Pensions. The bill would require plan sponsors to show on their annual benefit statements how the value of retirement accounts translates into lifetime guaranteed monthly income payments.
MetLife has a suite of four annuity products in qualified plans. Other carriers with immediate annuity or annuity-like lifetime income products for employees about to retire are Genworth, Prudential and Mutual of Omaha.
It could take time, however, before plan sponsors aggressively include annuities in their plans. They have expressed concerns about employees moving their entire retirement savings into an immediate annuity offered by the plan. State guarantee association insurance funds only cover up to $100,000 in annuity income if an insurer goes bankrupt.
Due diligence must be conducted on the financial strength of the insurance company, its risk-based capital measures, its reserves, its general account investment portfolio and the duration of its fixed-income investments. Other issues include annuity portability, cost, risk and fiduciary exposure.