Hewitt Survey Shows Employers Making Efforts to Reduce 401k Costs
Research Reveals Most Companies Concerned About 401k Fee Impact on Employee Retirement Savings
LINCOLNSHIRE, IL, June 10, 2004 -- More than 70 percent of employers are concerned about the total cost of their 401k plans, and many have taken steps to reduce expenses, according to a new survey by Hewitt Associates (NYSE:HEW), a global HR outsourcing and consulting firm.
"Recent investigations into the mutual fund industry have brought 401k fees into the spotlight," said Pamela Hess, a defined contribution consultant at Hewitt Associates. "It's encouraging to see that many employers are trying to understand how these costs are financially impacting their employees and that they are taking steps to reduce them."
To conduct its study, Hewitt surveyed more than 140 employers with 1.9 million participating employees. More than half (60 percent) said they have made or are planning to make reductions in investment management fees, which often make up 70 to 80 percent of a 401k plan's cost.
"Investment management fees -- otherwise known as fund expenses -- are typically the largest portion of total plan cost," said Hess. "They are also the most manageable and predictable costs to reduce, as employers typically have a number of funds to select from that meet their 401k plan needs. Employers can make relatively small changes in this area that can make a big difference in an employee's ultimate accumulated wealth -- often in the form of higher returns."
Employers Still Need to Act
While many companies have taken steps to reduce investment management fees, Hewitt's study shows that a large percentage of companies (49 percent) still have not attempted to evaluate their 401k plan's total cost.
"Calculating the total cost of your 401k plan - which may include investment management fees and other costs like trustee and administration fees -- can seem overwhelming and complicated, but it's critical that employers take the time to understand them," said Hess. "Managing fees and ensuring they are reasonable is a key fiduciary duty for employers, and reducing them can have a positive impact on employees' 401k savings -- potentially increasing these plan balances by hundreds of thousands of dollars by retirement age."
Review Your 401k Provider
Hess said it's important for employers to ask their 401k provider for a breakdown of all fees associated with the employer's plan -- both explicit and implicit.
"Some 401k providers bundle trustee and administration costs into investment management fees, making them somewhat `invisible' to employers and employees," said Hess. "In fact, many employers may believe they are getting these services free. It's important to know that not writing a check for fees doesn't mean these 401k services are competitively priced. Employers need to ask their 401k provider questions about total plan cost and make sure they understand the breakdown of administrative, trustee and investment management fees. Doing so will enable employers to better maximize the returns on their employees' 401k investments."
Review the Funds in Your 401k Plan
Because fund expenses make up most of a 401k plan's total cost, Hess said the selection of funds is a key component in keeping costs low. According to Hewitt's survey, 6 in 10 employers said they offer low-cost institutional funds as a way to reduce 401k plan costs.
"Institutional funds like collective trusts or separate accounts continue to be increasingly popular with employers, as they offer lower expenses than retail mutual funds," said Hess. "Costs are lower because there are typically no distribution fees and administrative costs tend to be lower than mutual funds. Moreover, institutional funds are priced on a sliding scale, so retirement plans offering them can use bargaining power to get the best deal. It's important to keep in mind that higher-cost funds do not necessarily equate to better-performing funds - typically it's just the opposite because the costs eat directly into returns."
Hewitt's survey also shows that nearly one third of employers with defined benefit and defined contribution plans use the same investment manager for both their pension and 401k plans as a way to leverage underlying assets and lower investment management fees when institutional funds are used. "Such a process creates economies of scale," said Hess.
Copies of the complete report, "Survey Findings: Defined Contribution Total Plan Cost 2004," are available for $150 by contacting the Hewitt Information Desk at (847) 295-5000 or infodesk@hewitt.com.
About Hewitt
Hewitt Associates (www.hewitt.com) is a global human resources outsourcing and consulting firm. It provides services from offices in 38 countries.
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