Here’s some good news: it is costing non-profit organizations less to operate their 403(b) plans.
That’s the conclusion of the 2016 BrightScope/ICI survey that examined ERISA plan data between 2009 and 2013. Average total plan costs fell to 0.73% of assets in 2013 (the latest available data in the study) from 0.82% in 2009. The BrightScope figures include administration, advice, and other fees gleaned from IRS Form 5500 filings, plus asset-based investment management fees.
Smaller plans tended to incur higher costs to run their 403(b) plans. Plans with $1-$10 million in assets experienced total plan costs of 0.91% of assets, almost double the 0.46% costs incurred by non-profits with more than $1 billion assets in their 403(b). Even plans with $100-$250 million in assets, at 0.54%, experienced far lower costs than the smallest plans. (Non-ERISA plans were not included in the survey.)
One factor pushing down total plan costs is lower mutual fund fees. But large plans continue to pay much less for investment management than smaller ones. Plans with $1-$10 million in assets incurred an average expense ratio of 0.67% for domestic equity mutual funds compared with 0.45% for plans with more than $1 billion in plan assets.
Even expense ratios for index funds can vary greatly depending on the size of the 403(b) plan. The average expense ratio for index funds in ERISA plans was 0.21% of assets overall, but came in at 0.32% for plans with $1-$10 million in assets. That compares to 0.17% for plans with more than $1 billion.
The average fees associated with operating small 403(b) plans vary widely
Just as is the case for small 401(k) plans, the cost of running small 403(b) retirement plans varies widely by provider. The BrightScope data reveal that total plan fees for small 403(b) plans ranged from 0.49% of assets all the way up to 1.48%.* The divergence highlights the need for a regular review of plan expenses, and the need for benchmarking against alternatives. The range was much narrower for large plans, with all-in costs ranging from 0.34% to 0.58%.
Who pays for 403(b) fees also varies
Costs incurred by 403(b) plans may be paid by the employer or the plan participants. How these costs are divided up can vary from plan to plan. For example, each participant may pay a flat fee for certain costs, or expenses paid for by participants may be allocated based on assets. In fact, based on surveys by the Plan Sponsor Council of America, there is little uniformity regarding key expenses when it comes to who pays for it. For example, participants paid for audit fees in 32% of plans surveyed while the organization foots the audit bill in 58% of plans. Some combination of responsibilities was arranged in the remaining plans. Recordkeeping fees were split 47% (participants) : 39% (organization).
Just as it makes sense to regularly review the overall costs of your retirement plan, it can be a good idea to review how those costs are funded. For smaller 403(b)’s the expenses can vary so much (as referenced above), making regular benchmarking even more important.
We’ve calculated the impact of various plan expenses – how much less would your employees have at retirement if the 403(b) plan expenses were higher? The table below shows how different employee-paid, asset-based fees can impact an individual’s retirement savings. This exercise assumes three separate retirement plans. In each, an employee invests $10,000 at the first of each year for 40 years – we’ve picked this time period to illustrate the impact over an individual’s career. The only difference between the three scenarios is the expenses paid by the employee.**
By the end of year 40, the employee in Plan C would have $390,233 fewer assets than an employee in Plan A. Such a large difference might equate to several years of salary:
Impact on Retirement Savings with Varying 403(b) Expenses
|**Plan A**||**Plan B**||**Plan C**|
|*Gross Annual Return*||7%||7%||7%|
|*Net Annual Return*||6.42%||6.20%||5.70%|
|*Assets in Year 40*||$1,831,422||$1,728,534||$1,441,189|
|*Difference from Plan A*||–||-$102,888||-$390,233|
|*Shortfall in Assets in Year 40 vs. Plan A*||–||6%||21%|
According to the PSCA survey, more than one-quarter of respondents said they were re-evaluating how plan expenses were allocated.*** Are your allocations and 403(b) expense levels due for a review?
* Based on the total plan cost of 80% of plans.
** Assumes each plan has a gross return of 7%. The employee invests $10,000 at the first of each year for 40 years.
*** 2016 Plan Sponsor Council of America 403(b) Plan Survey Results