2013 Fee Benchmarking Study

Scott Cameron, CFA Principal

 

On an annual basis Multnomah Group prepares fee benchmarking studies for its defined contribution retirement plan clients. The purpose of the fee benchmarking study is to evaluate the fees incurred for recordkeeping, administration, custody, and employee communication services to our clients' plans, and to provide comparative data on what types of fees the clients may incur if they elected to complete a competitive search process for services to their plan.

For each client we prepare an analysis of the fees they've paid based on their current service agreements, assets, and participant data. We then compare the pricing to a peer range based on the number of participants in the plan and the average account balance of each participant in the plan. In our experience, asset levels, average account balances, and participant head counts are the primary metrics that vendors use in determining pricing for plans. The peer range data is Multnomah Group's estimate of what a plan with similar demographics would pay if they elected to conduct a competitive vendor search process for services to the plan. Importantly, it is not a measure of what the average plan is currently paying. Our intent is to help plan sponsors evaluate the value they are receiving from their existing vendors and to determine whether the effort of conducting a search process would be fruitful.

Having completed this fee benchmarking process for four straight years now, we are able to evaluate pricing trends in the broader market. The biggest trend we have seen over that time period has been the broad-based price compression among vendors in the marketplace. The biggest factor in this trend has been the increased awareness of plan fees by plan sponsors and participants that came about from the fee disclosure requirements that were implemented last year. The chart below shows the average changes we saw in pricing across the peer ranges over the past 3 years.

trends_in_vendor_pricing

COMMENTARY

While we continue to see fee compression in the market, our study does not address two important topics for plan sponsor consideration. First, we do not believe the year over year declines that we have seen in the past few years are likely to continue. Plan sponsors are demanding greater services from their vendor partners, and vendors are working harder to demonstrate the value they provide to shift the discussion away from being pricing dependent. The vendors that are successful in this shift will be able to demonstrate their efficacy in improving retirement outcomes for participants within the plan.

Second, our study focuses on the standard plan fees charged by vendors to their plan clients. These take the form of base, participant-based, and asset-based fees or revenue requirements, etc. As plan sponsors evaluate fees, the focus tends to be on broad plan level fees. Anecdotally, we are starting to see vendors increase the transaction-based fees that receive less scrutiny. Examples include charging more frequently for fund changes, preparation of plan amendments, or fulfillment services that were not contemplated in the original services agreement (e.g., participant fee disclosure mailings). Vendors are attempting to combat the fee compression in plan level fees by tacking on additional charges for work outside the scope of the original services agreement.

SUMMARY

As we compiled our 2013 data we found that pricing continued to decline as it had over the past couple of years, although the magnitude of the decline was not as dramatic as last year. For plan sponsors, this indicates that there continues to be opportunities to address fee levels with their chosen vendor. If you have not completed a competitive search process or renegotiated fees in the past 24 months there is likely an opportunity to improve plan pricing or service levels.

 

Information herein is provided for general informational purposes and is not intended to be completely comprehensive regarding the particular subject matter. Multnomah Group does not represent, guarantee, or provide any warranties (express or implied) regarding the completeness, accuracy, or currency of information or its suitability for any particular purpose. Receipt of information does not create an adviser-client relationship between Multnomah Group and you. Neither Multnomah Group nor our advisory affiliates provide tax or legal advice or opinions. You should consult with your own tax or legal adviser for advice about your specific situation.