As 401(k) assets fall, investors could pay higher fees

Retirement plans are on track to lose considerable assets this year, which could lead to higher record keeping costs for some participants.

Several factors are moving money out of plans, including provisions in the recently passed Coronavirus Aid, Relief and Economic Security Act, which allows savers affected by COVID-19 to take early distributions or account loans. Market losses have also eroded plan assets.

That is significant for participants in plans that pay tiered, asset-based record keeping fees, as some will inevitably go below thresholds that previously got them discounts.

“We’re going to see plans repriced immediately,” said Jason Roberts, CEO of the Pension Resource Institute. And because of the new withdrawal provisions under the CARES Act, “We’re going to see a trailing impact for three years. People can keep that money out and not pay taxes.”

And workers, especially those who are struggling financially and not eligible for a company match, will be less likely to contribute to their plans, he said.

Defined contribution plans that pay for record keeping through asset-based fees do so through one of three different arrangements, said Chris Thixton, principal at Pension Consultants, Inc. Those categories are either a single asset-based fee, a tiered fee based on total plan assets, or a “first-next” arrangement in which one fee applies to a certain level of assets and lesser fees apply to assets above that amount, Thixton said.

“There’s no standardization in this industry in terms of how fees are assessed,” he said.

Plans with a tiered fee schedule, which lowers record keeping costs across all assets when a certain level is reached, would be most affected by falling asset levels, he said. However, that arrangement is less common today than it once was, he noted.

Declining 401(k) assets “definitely could affect [fees], just automatically,” he said. But, “a lot of those are older types of arrangements.”

Plans with a single asset-based fee probably won’t be affected, he said. Those with first-next tiered pricing could see less of a discount on assets that are above a certain level, but that might not be noticeable to many participants.

But there will likely be a consequence for many 401(k) plans in the coming months and years, Thixton said. Plan providers will almost certainly be hesitant to compete on cost in the same way they have since the 2008 financial crisis, meaning that plan sponsors will have difficulty renegotiating for lower fees, he said.

“We want fees to be low — not just reasonable … If we keep our fees low, every dollar we save is another dollar for retirement,” he said. “[But] this is in general not a time to go and renegotiate your fees.”

In the next few years, “we’re not going to have as many price reductions” approved by record keepers, he said.

Plans have become less expensive for participants since the financial crisis, due to both lower investment expenses and administrative fees, according to data from the Investment Company Institute and BrightScope. On an asset-weighted basis, total plan costs went from an average of 47 basis points in 2009 to 39 bps in 2016, according to a report published last year by those groups.

Plan providers will be discouraged this year from raising fees for clients whose assets fell below thresholds, said Michael Coelho, managing director of SageView Advisory Group.

“This is a terrible PR move — I don’t think they will raise fees because of shrinking assets,” Coelho said. “I don’t think they’re going to penalize participants in this environment.”

That could mean a grace period for plan sponsors, during which time they will continue to receive discounted pricing that was associated with higher asset levels in plans, he said.

That could also apply to investments, such as collective investment trusts, he noted. Conversely, plans that were very close to receiving discounts before the market free fall will be unlikely to get them, he said.

Going forward, record keepers will most likely use more realistic pricing levels than they have in the past, he said.

“Before, employers and employees had all the leverage,” he said. “Fees were falling so fast, [for plan providers] to stay competitive. Record keepers were kind of at [the plan sponsors’] mercy.”

Record keepers will also likely emphasize the suite of participant services they have developed, as part of the overall move toward financial wellness, he said.

“Financial wellness has yet to be monetized,” he said. “Plan sponsors are really valuing that service more than they ever have.”