The spoils of the 401(k) market have always gone to the large players – big retirement plan providers providing the best, most efficient plans to big plan sponsors. But small is starting to look beautiful.
Some of the industry's leading retirement plan providers have launched new offerings aimed at small workplace plans – a market segment that traditionally has born the highest all-in costs. The new offerings cut those costs dramatically – an advantage that will be bolstered as new federal regulations kick in this year mandating greater transparency in disclosure of information about fees to plan participants and sponsors.
Small employers and their employees stand to be the big beneficiaries – along with independent Registered Investment Advisor firms that work with retirement plans. Most of the plan providers view fiduciary advisors as key partners for bringing in new business at the small end of the market, and for providing relationship management, and participant education and advice.
The most important new market entrant is Vanguard Group, a major force in low-cost passive index fund investing and a big player in workplace plans. Vanguard launched a new initiative last fall targeting retirement plans with assets up to $20 million; although the new offering includes some actively-managed fund options, Vanguard's very low cost index funds are the company's key calling card.
Charles Schwab also launched a new low-cost offering earlier this monthcentered around passive investing, although the company is focusing on plans with at least $20 million in assets. The Schwab plan will cost participants 65 to 70 basis points, with financial advice included; without the advice, cost to participants is about 20 basis points.
And TIAA-CREF, a market leader among non-profit plans, recently re-launched its 403(b) platform with a focus on smaller plans and low cost. All-in cost ranges from 50 to 150 basis points. Meanwhile, T. Rowe Price and J.P. Morgan Asset Management both say that they are evaluating new initiatives focused on small plans.
Vanguard's entry, in particular, should add new energy to the small end of the market. Fidelity Investments has been a large force in the small-plan market for years, and says it currently serves 16,000 plans representing roughly 1.7 million participants. Other key players include Principal Financial Group and the Hartford insurance company.
How much less expensive is Vanguard? Although costs charged by platform providers vary by asset size and number of participants, the company offers up this example: the all-in fee for a plan with $5 million in assets, an average account balance of $50,000, and an investment lineup of Vanguard index and active funds would be 0.32 percent. By comparison, the industrywide average total plan cost for plans with less than $5 million is 2.09 percent, according to Brightscope.com.
“Some of these discount providers see an opportunity with all this enlightenment coming on fees,” says Tom Modestino, associate director of retirement markets for Cerulli Associates. “It puts a harsh light on some of the more expensive plans in the small end of the market.
“The big players have saturated the large-plan marketplace, so they're stealing marketshare from one another there,” he adds. But there's room to grow in the small end of the market.”
But the expense of serving small plans – and growing movement toward using fiduciary advisors – is leading to changes in how big platform providers will go to market. “The distribution landscape is shifting,” Modestino says. “We're going to see more decentralized models built around retirement specialist advisers.”
Cerulli reports that small- and mid-sized plans represent 25 percent of all 401(k) assets. Defined contribution specialists represent 10 percent of all advisors in this market, with a growing percentage in independent channels.
Along with fees, financial advice and education both are key elements of the emerging workplace plan market. Vanguard, Schwab and TIAA-CREF all say they plan to tackle the small plan market by working closely with RIAs. Vanguard says half of the proposals it is sending out are being requested by RIAs.
“Any RIA has a huge opportunity here,” says Tracy St. John, founder of Financial Avenues, LLC, a fee-only financial planning and investment advisory firm based in Kansas City, Missouri. “As an RIA, I can administer the plan and the client can choose what level of education or guidance they want to provide to employees.”
St. John finds that the employee relationships often develop into full-fledged planning projects that go well beyond guiding 401(k) investments. “The point is to to get in and build relationships,” she says.
The new competition comes at a time when retirement savers and plan sponsors will be focusing on costs as never before.
Participants in most workplace defined contribution plans will be receiving new quarterly reports that contain clear disclosure of investment fees; in most cases, the new reports will turn up in second quarter statements. Information will be disclosed about fees being charged to the plan – but more important, you'll be able to see the actual dollar amount charged to your own account.
The new reports are mandated under new U.S. Department of Labor rules, and the numbers should be a real eye-opener. Fees vary widely among retirement plans – anywhere from well below one percentage point to a whopping five percent. Yet 71 percent of retirement savers don't think they pay any investment fees at all, according to a recent AARP survey.
The knowledge gap isn't limited to employees, however. RIAs and plan providers face a challenge educating smaller companies about the benefits of cutting their plan costs. “For small company owners, it's usually about making payroll before benefits,” says Modestino. “If there is a benefit plan, it's going to be health insurance first – retirement is icing on the cake if they can do it.”
Mark Miller is a journalist and author who writes about trends in retirement and aging. Mark edits and publishes RetirementRevised.com, featured as one of the best retirement planning sites on the web in the May 2010 issue of Money Magazine. He is a columnist for Reuters and also contributes to Morningstar and the AARP Magazine. Mark is the author of The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work and Living (John Wiley & Sons, 2010).