BY: CHRIS SHANKLE, CPA, CGMA
Senior Vice President, Argent Institutional Services
The uneven economic recovery from the COVID-19 pandemic continues to exert financial pressure on companies of nearly every size, forcing management to take a magnifying glass to all operations and administrative costs, including funds allocated to match employee retirement contributions.
Most business owners and leaders expect profits to decline year over year for the rest of 2020. Market researcher FactSet estimates earnings for companies in the S&P 500 will fall 45 percent during the second quarter (compared to the same period in 2019). FactSet forecasts profits will drop 25 percent in the third quarter and 12 percent in the fourth quarter – and eventually rebound and grow 12 percent in the first quarter of 2021.
Prudent and proactive budgeting by plan sponsors may be the difference between helping employees save for retirement or not for the rest of 2020. Cutting plan expenses is a great place to start to preserve the all-important employee match to company retirement plans.
This article is the second of a three-part series intended to provide guidance for plan sponsors faced with cash flow pressure at their business. (You can find the first article here). The goal is to provide alternative solutions to consider before reducing contributions to participant benefit accounts.
EXAMINE ALL RETIREMENT PLAN FEES AND EXPENSES
The first step in cutting expenses is to review all vendor fees being charged to the retirement plan. It is not as easy as it sounds because invoices can be particularly confusing. Fees are billed on a flat rate, per retirement plan participant and/or a percentage of assets in the plan. Services also are often provided by different vendors. Further complicating the matter, fees are separated into these three general classifications:
• Administrative/recordkeeping: All fees that are not related to managing plan assets
• Investment: Fees based on managing plan assets
• Advisory: Consulting fees to help manage the plan
Per the Employee Retirement Income Security Act (ERISA), plan sponsors are not required to pay the lowest fees. Sponsors do, however, have a fiduciary obligation to ensure the fees paid are reasonable and that there is a clearly defined, objective process to validate the cost for the services rendered.
To determine the reasonableness of the fees, plan sponsors should conduct a benchmarking analysis. Retaining an independent advisor to manage the study is preferable to undertaking the project internally. Benefits executives will find it challenging to obtain current, reliable data that can be used to compare the cost of their company’s plan to industry peers. An independent analysis by an advisor with a proven track record will provide plan sponsors an unbiased look at plan costs and confirm that services are fairly priced.
INVITE OTHER VENDORS TO BID FOR YOUR RETIREMENT PLAN
Another potential solution to lowering fees is to put the retirement plan up for bid. Fee compression during the past several years has pushed down the cost of managing company retirement plans.
Not surprisingly, more benefits executives are switching providers because of the need to lower costs, according to Deloitte. In its “2019 Defined Contribution Benchmarking Survey Report” Deloitte found that 25 percent of plan sponsors changed providers to reduce fees, up from seven percent in 2017, marking the first time in the survey’s history that cost, instead of the quality of recordkeeping services, was the number one reason for switching providers.
In addition to possibly lowering fees, a thorough vendor search may also identify retirement plan advisors who can provide better service, which in turn could help increase employee participation. A new vendor may offer enhanced communication and educational tools to participants that may boost employee engagement. The vendor may also offer a better selection of investments that could over time increase the amount of money employees have available at retirement.
Putting a retirement plan up for bid does not necessarily result in changing service providers. To retain the business, the incumbent advisor will often introduce new services and/or reduce fees. One important note of caution: Beware of service providers who submit bids that seem too good to be true. More often than not, the initial low fees are replaced with much higher charges after a few years of service.
Fee benchmarking and putting your plan up for bid once every three-to-five years are considered best practices for managing your company retirement plan. The extensive data collected through a vendor search process and benchmarking study provides plan sponsors with a better picture of plan costs and services. Armed with this intelligence, benefits executives are in a better position to negotiate lower prices (and improved services) to sustain employer contributions to the company retirement plan and help employees save for later in life.