401(k) adviser fees for small plans buck compression trend

Fees for plans with $10 million have increased 12% in five years, while those for plans with $100 million have declined 20%

Mar 29, 2019 @ 4:41 pm

By Greg Iacurci

Small 401(k) plans are proving to be an oasis of sorts for financial advisers even as fees for larger plans are declining rapidly.

Average advisory fees for a $100 million 401(k) plan decreased by 9% in 2018 from the year prior, according to Fi360, a fiduciary consulting firm. The fee — around $71,000, or 7 basis points on plan assets — has declined 20% since 2013.

Meanwhile, fees among smaller 401(k) plans have rebounded from historic lows, the Fi360 data show. The average fee for a $10 million plan has increased 13% since 2017, to $28,000, or roughly 28 basis points. That's 12% higher than in 2013.

"We're still seeing some pretty heavy compression, but that seems to be reversed in some smaller plans," said Matt Burt, director of professional services at Fi360.

Most 401(k) service providers haven't been able to hide from fee compression.

Median fees for record-keeping services dropped by about half over the decade through 2016, according to NEPC, a consulting firm.

Asset managers haven't been spared, either — the average fee for a domestic equity mutual fund in a 401(k) plan dropped 29% between 2009 and 2015, according to an analysis conducted last year by BrightScope Inc. and the Investment Company Institute.

Lawsuits targeting 401(k) plans — primarily large plans with hundreds of millions or billions of dollars of assets — for excessive fees have contributed to the trend, as plan sponsors become more acutely aware of their duties to ensure reasonable costs.

Advisory fees for large plans have also been reduced as the result of a convergence of competitors: Larger consulting firms such as Mercer are increasingly moving down-market as smaller advisory teams move upmarket, according to experts.

"The Mercers of the world, 10 years ago they weren't looking at doing a $10 million or $20 million plan," Sean Deviney, director of retirement plan consulting at Provenance Wealth Advisors, said of the national consulting firms moving down-market. "Now, you run into them in some circumstances."

Experts also say some advisers working with large plans are purposely underpricing their services in this market to secure new business. In addition, most retirement plan advisers working with plans with more than $100 million often charge a flat annual dollar fee for services, as opposed to an asset-based fee, Mr. Burt said, which often results in a lower aggregate fee.

However, retirement-plan specialist advisers that work with smaller 401(k) plans have been able to increase their fees as they've offered more comprehensive services, experts said.

Advisers traditionally provided services such as selecting and monitoring investments, but now they often offer more services to justify a higher annual fee, such as consulting around plan design, vendor evaluations and searches, employee education, financial wellness and fiduciary training for plan sponsors, Mr. Burt said. They've also instituted revenue minimums for taking on new business, he said.

"I think for a very long time in the smaller end of the market, since it was mainly being serviced by retail advisers — or non-retirement specialists — it was drastically underpriced because they weren't doing anything," Mr. Deviney said.

Fi360's fee data are based on a survey of 316 retirement specialist adviser practices that have more than 1,200 advisers and staff, 15,000 401(k) plans and $350 billion in retirement assets.

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