Financial advisers, sponsors offered new yardstick for retirement plan fees

Recognizing the challenges that employers face in choosing a 401(k) plan, a software developer has introduced a service that provides a benchmark against which to measure plan costs.

The free service, from Financeware Inc., sifts through more than 33,000 mutual funds to find those suitable for employers based on the number of participants and assets under management. The program, which Financeware developed, recommends funds based on cost, diversification and risk.

The recommendations are intended to meet criteria established by the Employment Retirement Income Security Act of 1974, said David Loeper, chief executive of Richmond, Va.-based Financeware.

“We are trying to find funds with reasonable expense ratios,” said Daniel Traub, vice president of Braver Wealth Management Inc. of Newton, Mass., which has $400 million in assets. “A program that compares plans and funds of different companies would be helpful.”

Indeed, all fees — including those associated with providing education, individualized advice, auditing and brokerage services — are taken into account, Mr. Loeper said.

The program is also designed to seek out the least expensive share class of individual funds, he said.

“We built a program to custom-calculate what the best pricing practices are,” Mr. Loeper said.

“It creates a benchmark to compare,” he said. “It is meant to be used as negotiating leverage with your plan provider.”

The service comes amid an increase in litigation against plan sponsors for breach of fiduciary duty. It also comes as federal regulators are paying more attention to how 401(k) fees are disclosed.

“It’s easy to see what the funds’ expense rates are, but that’s only a piece of it,” said Rob Williams, an adviser and portfolio manager at Baltimore-Washington Financial Advisers Inc. of Columbia, Md., which has $200 million in assets under management.

“There are other expenses,” he said. “The more transparency, the better off we’re going to be.”

The ability for plan sponsors to make comparisons will likely reduce costs, said Ivory Johnson, director of financial planning at Scarborough Capital Management Inc. of Annapolis, Md., which has $1 billion in assets.

“The more transparent the market is, the more efficient it becomes,” he said. “Prices will go down based on competition.”

Plan sponsors use a variety of methods to judge plans.

Large employers, for example, tend to hire consultants. Smaller employers, meanwhile, typically do their own due diligence.

Many sponsors benchmark their 401(k) costs against annual data found in the 401k Averages Book, which is published by HR Investment Consultants Inc. of Baltimore. The book provides average cost data on nearly 130 different plans.

The range in fees can be significant. For a 500-participant plan with an average account balance of $50,000, the cost can be anywhere from $211 to $822 a year, said Joseph Valletta, principal of HR Investment Consultants. The average fee is $599 per participant, he said.

Investment expenses account for about 87% of total plan costs in smaller plans and 99% in larger ones, Mr. Valletta said.

“The employer needs to make sure they understand everything about the fees,” said Pam Hess, director of research at Hewitt Associates Inc., a human resources consulting firm based in Lincolnshire, Ill. “They need to meet with the plan administrator and look at how fees are being communicated to participants.”

To obtain information about the Financeware service, visit “Fee Compliance Kit” on the firm’s website, 401kripoff.com.

E-mail Sue Asci at [email protected].