Low-cost entries shake up small retirement plan market

By Mark Miller
(Reuters) - If you own a small business, the
time to comparison-shop for 401k plans has never been better.
Low-cost plans are cropping up, as new federal regulations
kicking in this year call for greater disclosure of fee
information to plan participants and sponsors.
The numbers should be a real eye-opener. Fees vary widely
among retirement plans -- anywhere from well below 1 percentage
point to a whopping 5 percent. Yet 71 percent of retirement
savers don't think they pay any investment fees at all,
according to a recent AARP survey.
That's a significant issue, since fees are one of the most
important factors determining success or failure in meeting
retirement goals. Small workplace retirement plans have some of
the highest all-in costs in the industry.
But as Sam Cooke crooned so memorably: a change is gonna
come.
The 401k Fair Disclosure for Retirement Security Act takes
effect in April.
To compete in the new environment, some of the industry's
leading retirement plan providers are launching new low-cost
offerings aimed at small plans. The most important entry to date
is from Vanguard Group, a leader 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, the platform really is built
around Vanguard's very low-cost index funds.
Costs charged by plan providers vary by asset size and
number of participants. But Vanguard offers up this example: The
all-in cost 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, which
analyzes 401k plan performance and trends.
Charles Schwab launched a new low-cost offering
earlier this month centered around passive investing, although
the company is focusing on plans with at least $20 million in
assets. Schwab's plan will cost participants 65 to 70 basis
points, with financial advice included, or $650 to $700 in fees
on a $100,000 account. Without the advice, the 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 low
cost. All-in cost ranges from 50 10 150 basis points, according
to John Hays, managing director for the nonprofit sector at
TIAA-CREF. "This is one of the fastest-growing areas in the
non-profit market," Hays says.
Along with fees, financial advice and education are key
elements of the emerging workplace plan market. Vanguard and
others focused on small plans incorporating advisory services --
by working closely with registered investment advisers (RIAs)
who have fiduciary duty to make unbiased investment
recommendations to plan participants. Vanguard says half of the
proposals it is sending out are being requested by RIAs.
Vanguard's entry should give a meaningful jolt to the small
end of the workplace plan 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.
"Vanguard's arrival should get everyone's attention," says
David Huntley, publisher of the "401k Averages Book," an
industry guide to plan fee information. "I think it's exciting -
not just because of their reputation for low cost. They also
have a great reputation for service in this industry."
The market response to the new Vanguard offering has been
strong, says Kathy Fuertes, head of Vanguard's Retirement Plan
Services for small business. "We're substantially above what we
had forecast."
Fuertes adds that many of the inquiries it has received come
from employers who are considering starting retirement plans for
their workers for the first time. "This is a very high-cost
marketplace and there weren't a lot of options for small
businesses who were cost-conscious," she says.
(The author is a Reuters columnist. The opinions expressed are
his own.)
(Editing by Lauren Young, Beth Pinsker Gladstone and Andrea
Evans)