When High Fees Present Opportunities

Posted by PlanFees on Sep 26, 2023 7:41:00 AM

With the recent uptick in excessive fee lawsuits, it’s only natural to think of high fees as nothing but trouble for plans. After all, 401(k) fee litigation resulted in more than $150 million in corporate settlements between 2019 and 2022 alone. But while a certain degree of trepidation is warranted, don’t let fear obscure your ability to identify opportunities for improvement. 

Up the Ante With Providers

A high fee can be a chip or two on the bargaining table in a plan’s favor. When higher-than-average fees are brought to their attention, providers may be more willing to lower fees or up their services as a result. Otherwise, it can be an opportunity to onboard new providers who may better serve the needs of the plan sponsor and participants. Ultimately, you may end up with a higher level of service — or lower fees — in the end.

Overhaul Investment Options

Uncovering high fees could also lead you to rethink the investment lineup rather than switch service providers. Shifting from actively managed to passively managed investments can lower fees significantly — the average expense ratio for a passively managed equity fund is around 0.06%, compared to 0.68% for actively managed (a tenfold difference). If your client’s plan has a higher proportion of actively managed investments that trigger a high fee alert, it may be time to consider lower cost options, such as index funds and ETFs.

Spruce up the Plan’s Services

Finding high fees may signal a need to better optimize the plan and identify essential services. RFP Express can generate up-to-date quotes and fee breakdowns from top providers within 24 hours. It can give you the actionable data you need to respond quickly. You and your client may determine that a higher fee is, in fact, warranted because it offers participants greater loan flexibility or a superior financial wellness offering. One study found that workers increased their contributions anywhere from about $1,200 to $3,600 after attending a financial wellness webinar on budgeting. 

Stay Ahead of Risk

High plan fees should lead to a systematic review, which can help uncover opportunities to improve regulatory compliance and mitigate other risks. By addressing the underlying sources of high fees — such as an expensive recordkeeper, an unsuitable investment lineup or excessive custodial costs — you’re taking an important step toward helping plan fiduciaries by deploying a more proactive risk-assessment strategy. The PlanFees suite of benchmarking tools makes it fast and easy to monitor fees between customary three-to-five-year live-bid benchmarks.

It Shouldn’t (Necessarily) Be a Race to the Bottom

It can be easy to think your best approach is to always seek out the lowest fees no matter what, but don’t let fears of an excessive fee lawsuit prevent you from assessing a plan holistically. Reasonable does not always equate with the lowest fees. By using the PlanFees’ benchmarking toolkit, you can stay on top of fees — and reveal opportunities to make changes to ensure a plan better meets the financial needs of participants and the business objectives of plan sponsors. 

Benchmark better with PlanFees.

Topics: PlanFees