Perspectives : Fiduciary Regulatory | October 27, 2021

All in: Understanding the total cost of your retirement plan

As fiduciaries, plan sponsors must be aware of the fees their participants are paying—and the impacts those fees have on participant outcomes.

It continues to be clear how vitally important corporate retirement plans and accounts are when it comes to the individual investment success of Americans. As a retirement plan executive who spent some of his 30 years in the industry as a plan sponsor, John James, managing director and head of Vanguard Institutional Investor Group (IIG)—recordkeeping and asset management services—understands the importance of the retirement plan and the fiduciary risk plan sponsors assume in the management of these programs.

As the retirement plan industry continues to evolve, with new products and solutions announced daily, plan sponsors have to remain diligent that they fulfill their fiduciary obligation to their participants. PLANSPONSOR recently spoke to James about the need for transparency in the retirement plan industry and what plan sponsors should evaluate when examining costs.

PLANSPONSOR: For many years, plan sponsors have generally received pricing in pieces; recordkeeping fees are one element, ancillary fees such as participant transaction fees are another, and increasingly prevalent are fees associated with advice (or "managed accounts"). How do you think this has affected the perception of provider value? And total cost?

James: It's made it very difficult to determine the true cost of the plan and to determine what's being paid by plan sponsors and their participants. Lack of transparency is the issue—both on fees for those discreet items you just referenced and on the interplay between those fees.

Take advice, for example. Plan-level factors such as AUM [assets under management] and participant adoption rates often determine fee schedules, which, at the participant level, then differ based on assets. Participants are then later subjected to much more expensive advice fee schedules and/or higher priced investments when they are targeted for retail rollovers upon retirement or separation from service. This pricing is hard to follow, right? That's the problem.

And what's more problematic is those less-than-transparent fee schedules on advice and other services are often subsidizing "low" base recordkeeping fees.

We think the best way to look at fees is to look at them as a total and transparent all-in cost, not in separate silos. In an ideal state, there would be a clear industry standard for disclosing total cost of ownership. Pricing practices would be transparent and easy to compare, reducing bureaucracy and fiduciary risk.

PLANSPONSOR: Given all of that, why should plan sponsors pay attention to the "total cost of ownership" as it relates to running their retirement programs?

James: One of the main things to pay attention to is fiduciary risk. We're in a very litigious environment right now, especially when it comes to fees. This makes understanding fees and fee-subsidization dynamics all the more important.

This is especially true for advice, as I mentioned. Advice services can deliver positive outcomes for plan participants and are becoming more commonplace in plans. We've seen that advice can play an important role in helping many participants by creating positive financial and emotional outcomes.

But we've also seen providers adopt business models that employ nontransparent pricing approaches for advice to subsidize base recordkeeping fees so that they can quote significantly reduced pricing to prospects. Similar to the processes many plan sponsors have developed to evaluate fund costs and investment lineups, they should pay attention to the total aggregate of base recordkeeping, ancillary, and advice fees to help ensure they are fulfilling their fiduciary responsibilities to their participants. Consultants and advisers can certainly help in this regard.

PLANSPONSOR: Much of the litigation in the DC [defined contribution] space has focused on cost. While plan sponsors are not required to buy the cheapest of anything, they are required to ensure their pricing is reasonable. What questions should plan sponsors ask their recordkeepers to ensure they understand pricing?

James: The first question to ask is, "Does the quoted recordkeeping fee include all applicable pricing components—recordkeeping fees, advice, ancillary fees, and the expense ratios for funds?"

Other questions to ask are, "Does the base recordkeeping fee change if you don't include advice or other services in your plan?" and "How does your firm make money?"

And finally, "Do you revenue share or sell/mine participant data?"

The answers to these questions will show you the type of partner you have when it comes to your plan and helping your participants meet their retirement goals.

PLANSPONSOR: As plan sponsors look to ensure they improve outcomes for their participants, what relationship does this all-in cost have to those outcomes? What types of benchmarking are available for plan sponsors to evaluate the cost against value and outcomes?

James: The all-in cost plays a vital role in improving outcomes for plan participants because costs take away from returns. The lower the all-in costs, the more money participants keep.

That is the Vanguard philosophy. Because our investors are our owners,1 we can focus on the long term rather than quarterly results, and we can pass along economies of scale and lower the cost of investing so that participants keep more of their returns.

By focusing on all-in costs, plan sponsors can see how firms make money and where their values truly lie. Getting a fuller picture of how a firm charges fees can help you identify if it has your best interests in mind.

So, beyond fees, plan sponsors should look at the overall value for the plan. Is the provider transparent with its fees and services and is it putting your participants first?

PLANSPONSOR: What type of plan sponsor makes a good client for Vanguard?

James: Vanguard clients share our core belief that participant outcomes should be prioritized above all else. Our clients believe in the important role plan design, such as automatic enrollment, plays in helping participants achieve retirement readiness.

Our clients understand the positive impact advice can have on participants' financial and emotional well-being, and that a low-cost advice offer should be available to participants who want it.

And finally, our clients share our belief that participants deserve a world-class service experience to help them achieve their goals. We work together with our clients to constantly learn and improve our platform to create personalized and hyper-relevant experiences for every participant to better serve them and help them meet their financial goals. The lower the all-in costs, the more money participants keep.

Reprinted from 2021.
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1 Vanguard is owned by its funds, which are owned by Vanguard’s fund shareholder clients.


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John James

Managing Director