Cost Savings Strategies For Your Retirement Plan
As a fiduciary investment advisor to retirement plans, our core job is to put together a menu of investment funds for your plan to make available to your plan participants, and there are literally tens-of-thousands of funds to pick from...
...The legal standard governing this process is quite broad -- in essence, the plan must offer enough choice for a participant to adequately diversify. In the early days of 401(k) back in the ‘80’s, the typical plan had five or fewer funds. Today, most plans have between 15 to 30 funds in their menu. Ironically, each approach could pass the above legal standard as long as it is shown to be in the best interest of plan participants.
As outlined in my prior blog, another major role we play as your plan’s fiduciary advisor is to help you determine and control plan costs. Accordingly, we believe it is our job to not only identify all plan costs, but to always bring you ideas on how to reduce overall plan expenses:
Passive versus Active Investment Management – Active money managers generally employ high-priced humans to manage the underlying investments. Most often their goal is to out-perform their pre-defined benchmark. Historical data shows that many active managers fail to provide this performance premium. Therefore, another option is to actually “buy the benchmark” by instead hiring low-cost passive index managers. For most plans, investment management costs are the biggest expense. Numerous recent fiduciary lawsuits center on plan sponsors failing to monitor this expense.
Utilization of Low-Cost Mutual Funds and ETFs – Whether your plan offers active or passive funds or both, higher investment management fees do not buy you better investment management talent. There is no correlation between higher fees and higher performance. The one thing in the investment management equation that is controllable is cost. And several 401(k) recordkeepers today allow low-cost ETFs to be in the plan’s available universe of funds to choose from.
Cheaper Share Classes – Plan sponsors should always be evaluating whether there are cheaper share classes of their existing funds available. Most fund families offer lower cost “institutional share classes” for retirement plans. Recent rulings by the Department of Labor and the courts illustrate that this level of analysis is clearly an expectation of fiduciaries.
CITs versus Mutual Funds – Without question, mutual funds are the dominant form of investment vehicle found in plans today, but they are not the only legal investment vehicle for plans to choose from. Many large plans have further reduced their investment management expense by moving to Collective Investment Trusts (CITs) for some or all of their investment options. Mutual funds were invented to allow the small retail investor to adequately diversify, and they are regulated by the Securities and Exchange Commission. CITs, however, are regulated by banking law, and are not available for the individual to invest in outside their 401(k) plan. Consequently, their cost for doing business can be lower. Once available only to very large plans, many are now available to even the very small plans. And many mutual fund companies are actually coming out with lower cost CIT versions of their mutual fund options.
Buying in Bulk – There is no question that more money buys you a better deal in the financial services business. Consequently, big plans have a lower overall cost structure than smaller plans, measured as a percentage of total plan assets. There are, however, ways for smaller plans to band together and collectively become a bigger plan, and thus get better pricing.
Benchmarking – Plan fees have come down dramatically over the last several years. Proper fiduciary governance warrants plan sponsors to do a total cost analysis on an annual basis, and benchmark their plan relative to plans of a similar size. Fortunately, there are national databases available for this comparison.
RFP – Despite dramatic industry fee compression, plan service providers seldom voluntarily offer to reduce their fees. If you’ve been with a service provider for five years or longer, nothing brings them to the negotiating table faster than issuing a formal Request for Proposal (RFP) or briefer Request for Information (RFI). Plus, the results of this exercise don’t look bad to have in your Investment Committee or Administrative Committee minutes from a fiduciary governance standpoint.
Hire a Fiduciary Investment Advisor for the Plan – The vast majority of plans hire an experienced fiduciary investment advisor to not only assist in selecting and monitoring the plan’s investment menu, but to also oversee the responsibility of controlling plan costs. In essence, you are outsourcing some or most of your fiduciary responsibility, allowing you to focus on what you’re an expert at – getting more of your product or service out the door. Plus, the really good advisors will help you identify and decrease a huge hidden expense for most employers – the cost of delayed retirements.
Are you getting these ideas from your current advisor?