Price cuts coming to 401(k) fees

Plan providers being pressured to trim their cost structures

Dec 7, 2008 @ 12:01 am

By Lisa Shidler

In an effort to maintain a tight grip on retirement assets, some major 401(k) providers — including The Charles Schwab Corp. — are considering lowering the investment management fees they charge to employers. Executives at San Francisco-based Schwab, which is one of the nation's largest providers of 401(k) services with more than $200 billion in retirement assets, are working with plan sponsors to come up with more "creative" deals. While the company is being tight-lipped on whether those deals will result in lower fees, "there has been a trend to lower fees, including lower investment fees," company spokesman Mike Cianfrocca wrote in an e-mail. Malvern, Pa.-based The Vanguard Group Inc. meets with clients throughout the year to discuss fees, according to spokeswoman Linda Wolohan. Fidelity Investments of Boston, another big provider of 401(k) services to employers, declined to comment. "Companies have limited budgets," said John "Jamie" Kalamarides, a senior vice president at Newark, N.J.-based Prudential Financial Inc., which also provides 401(k) services. "They want to know that they're getting a return for a secure retirement." Indeed, advisers who specialize in working with corporate 401(k) plans said dismal market conditions have given employers the upper hand when it comes to negotiating fees. In some cases, they said, providers have dropped their investment management fees by 0.05 to 0.2 percentage points to keep plan sponsors happy. "They're open for the discussion more now than ever before in the past," said Mike Hudson, an adviser with Captrust Financial Advisors of Raleigh, N.C., which manages about $25 billion. "You'd think fee reductions would slow down because the market is down 30% or 40%. They're worried about losing their business." Mr. Hudson works with plan sponsors with between $50 million and $500 million in retirement assets.

In some cases, 401(k) providers are even going so far as to initiate conversations with plan sponsors about ways to cut costs, said Stace Hilbrant, managing director of 401k Advisors LLC in Wilmette, Ill., which oversees more than $750 million in assets.

"I think they feel like they have to negotiate," he said. "There is such pressure. Their business is down. They're not gathering new assets, so they have to be more aggressive about retaining assets under management."

Recently, Mr. Hilbrant was approached by a representative from Fidelity about moving a client's employees from A shares into a less expensive class of shares. The move would have saved the client about 0.2 percentage points, he said.

"They came to us with that," Mr. Hilbrant said. "You appreciate them being that proactive."

That willingness to make concessions may soon be coming to an end, however. If the stock market continues to tumble, 401(k) providers may hit a point where they simply cannot afford to lower fees. In fact, they may have to start raising fees to make up for shrinking assets.

"You'll see pressure both ways," said Jim O'Shaughnessy, a managing partner and adviser with Sheridan Road Financial in Northbrook, Ill., which has about $1 billion in assets. "There are whispers that fees may be increasing, but we have others that have the pressure to keep the fees steady or to improve them."

HIGHER FEES?

Going forward, it'll likely be more difficult for advisers to negotiate fees unless they're quite creative, said Fred Barstein, chief executive of 401kExchange Inc. in Lake Worth, Fla.

He believes fees are headed up in 2009.

"To lower hard-dollar fees or asset-based fees is suicidal," Mr. Barstein said. "But some have said, 'I have to, because the competition is doing it.' There are so many weird things going on."

More likely, negotiations will be based on absolute price and not on a percentage of assets. This way, if the assets grow, it won't affect the fees, Mr. Barstein said.

"They have to figure out a new dynamic," he added.

E-mail Lisa Shidler at lshidler@investmentnews.com.

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