Now that the recession has subsided, many small companies are reassessing their retirement plans and primarily the costs associated with these plans. While the number of employers that traditionally change plans is relatively small (usually less than 10% annually), small companies today are carefully comparing their existing providers and identifying the cost of providing benefits.
In recent research conducted by Spectrem Group 33% of small plan sponsors (those with fewer than 100 participants) changed providers primarily due to cost. The second most common reason for changing providers was investment issues. The third reason, service issues (14%), used to be the primary reason for change.
So what caused the change? Several factors simultaneously nudged plan sponsors into concerns over their plan costs.
-Recent legislation that will require greater disclosure of plan fees has caused employers to realize that the plans were more costly than many understood. In the small plan market, especially, plan sponsors may have chosen a plan that holds shares that pay retail charges when traded or alternatively may be wrapped by an annuity fee. Even if the costs are passed to the plan participant, the employer may be worried about the liability for passing excessive fees on to their employees.
-Plan sponsors, in cutting their own budgets, may have realized that they are paying more for their plans than they want to.
-There are an increasing number of "experts" who want to assist plan sponsors
in choosing the right option.
In the past decade, service issues were more frequently an issue because many providers were quickly upgrading their services...providing more online capabilities, more participant advice and other services. Therefore, when a plan sponsor learned of better services, it would often lead to a change. Plus, in many cases, the fees were hidden and plan sponsors didn't really understand what was being paid.
The greater disclosure will be good for both plan sponsors and plan participants. The costs incurred in administering a 401(k) plan are greater than anticipated. Some of the fallout may include not only understanding what the fees are but also why they are necessary.