Plan providers being pressured to trim their cost structures
By Lisa Shidler December 7, 2008, 6:01 AM EST
In an effort to maintain a tight grip on retirement assets, some major 401(k) providers ... are considering lowering the investment management fees they charge to employers.
Executives at San Francisco-based Schwab ... 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. ...
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. ... "You'd think fee reductions would slow down because the market is down 30% or 40%. They're worried about losing their business."
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 ...
"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." ...
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. ...
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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