When it
switches providers in December, Playtex Inc. will save
$500,000 over the course of the contract in fees that
had been paid by its 401(k) participants.
Julie
Row, director of benefits at Westport, Conn.-based
Playtex, said, “Our current vendor was making a lot of
money off us on fees for investment management.” Playtex
has three qualified defined contribution plans in the
United
States and one in Puerto Rico, which total about
$110 million.
At the $500 million City of San
Diego Deferred Compensation Plan, its current provider,
AIG VALIC, Houston, is doing a report on the
administrative costs of running the plan, relative to
the revenue it generates, according to Valerie Van
Deweghe, benefits manager.
Ms. Van Deweghe said the plan
expects the VALIC report by November. If there is a
substantial difference between the costs paid and the
revenue generated, she said, trustees will negotiate for
lower the fees. San Diego's contract with VALIC ends
next year. Ms. Van Deweghe said the plan might decide to
issue an RFP for a new provider if negotiations with
VALIC over fees are unsuccessful.
Playtex worked with The Glading
Group, Montclair, N.J., to assess revenue-sharing fees
its participants were paying to its current provider,
Boston-based Putnam Investments Inc., and negotiate
lower fees with the new provider, New York Life
Investment Management Inc., for its two-year contract.
Currently the Playtex 401(k)
plans are paying 51 basis points in fees to Putnam. When
it switches to NYLIM in December, the total fee will be
37 basis points. Previous relationship Ms. Row said
Putnam was willing to cut its fees, but the overall
package of bundled services offered by NYLIM, including
the reduction in fees, was superior to what Putnam
offered.
Ms. Row said the Glading Group
had previously done consulting work for Playtex, and
when company officials decided to look at fees, they
wanted an independent consultant and believed Glading
was the best for the project.
"Many providers are making
excessive profits through revenue-sharing arrangements,"
said Brent Glading, managing director and founder of the
eponymous firm. "We can determine how much it really
costs to service a (DC) plan."
Mr. Glading cited the example of
another unidentified 401(k) plan that has $2 billion in
assets and 20,000 participants. His firm determined that
the plan was generating $8 million in annual revenue for
its provider, while the actual cost of running the plan
was $2 million, he said. Mr. Glading pointed out that
while the plan sponsor might not be paying any fees for
administration of the plan, plan participants are the
ones paying the investment management fees. "Everything
is borne by the participants - if there's an opportunity
to recapture revenues, it should be done."
He also pointed out that it is
the fiduciary duty of plan sponsors to make sure the
plan pays the lowest fees possible. Mr. Glading thinks
the next area of defined contribution plan litigation
could very well be over excessive fees.
Source of
lawsuits?
Ian Kopelman, head of employee
benefits litigation at Piper Rudnick, Chicago, said, "To
the extent that fees paid by the plan are passed through
to plan participants, it is the fiduciary responsibility
of whoever chooses the provider to make sure that the
fees are not excessive." He declined to say whether the
fees paid, if they are deemed excessive, could be a
source of class-action lawsuits.
Mr. Glading said he recently got
a call from attorneys with Bernstein Litowitz Berger
& Grossman LLP, New York, which specializes in
class-action lawsuits. They were exploring the
possibility of suing defined contribution plan service
providers over fees.
Doug McKeigh, a partner in
Bernstein Litowitz, said, "When the trustees of defined
contribution plans negotiate deals with service
providers, they have to make sure that they know what
the costs will be to plan participants and have to know
they are not being overcharged for the services. Whether
or not there will be class-action lawsuits arising out
of this issue will depend on the circumstances of any
given situation and whether or not there is an egregious
situation showing that (DC plan) trustees are not doing
their job."
Glading Group has worked with 25 companies with defined contribution plan assets ranging from $50 million to $2
billion. It is currently doing revenue sharing and fee analyses for 12 companies, which he wouldn't identify.
