Aon Hewitt Encourages Defined Contribution Plan Sponsors to Reevaluate How Workers Pay Fees

Administration Fee Consistency Can Help Workers Improve Retirement Savings

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Jun 04, 2014, 09:12 ET

LINCOLNSHIRE, Ill., June 4, 2014 /PRNewswire/ -- To help workers secure a more healthy financial future, Aon Hewitt, the global talent, retirement and health solutions business of Aon plc. (NYSE: AON), urges employers to take a closer look at their defined contribution plan costs and make sure they are distributed consistently among all employees, no matter their investment selection.

According to a recent Aon Hewitt survey, half of plan sponsors are very or somewhat concerned about 401(k) plan expenses and three-quarters of employers review their fees and plan costs annually. However, many are not assessing fees evenly across all asset classes, leaving some workers to pay a greater share of the costs. Aon Hewitt data shows that just one-out-of-five (21 percent) of plan sponsors has recently restructured the administrative fees of their plan to be assessed in a more equitable manner. Of the remaining group, only 6 percent are likely to do so this year.

"In addition to reviewing the aggregate fees paid by the plan, it is important for plan sponsors to conduct a more detailed analysis to determine if certain employees are shouldering a larger percentage of fees than others," said Winfield Evens, CFA, director of HRO Investment Solutions & Strategy at Aon Hewitt. "Our research shows more than half currently rely on expense reimbursements from investment options to defray administrative costs. But because of the wide range of payments provided by different asset managers and share classes, in many situations, the majority of plan costs are paid for by a minority of workers. Even participants with the same account balances are often paying significantly different amounts for plan administration. Best-in-class employers are moving away from this approach and are designing their fee model so that an employee would pay the same amount in fees regardless of how their portfolio is allocated."

Recommendations for Employers
To appropriately and effectively manage total plan costs, Aon Hewitt recommends that employers:

Assess overall plan expenses (including both investment and administrative fees) and determine how much each participant pays. Plan sponsors should understand and be able to explain why certain groups pay higher fees than others.
Leverage institutional vehicles and pricing where possible. Choosing low-cost institutional fund options is one way to cut fees for workers and ultimately lead to larger plan balances. For example, decreasing fees by 25 basis points per year (0.25 percent) can be equivalent to saving 0.75 percent more each year for a worker over the course of a 40- year career.[1]
Distribute plan expenses across the plan population in an equitable manner.
- For an asset-based approach, companies should select funds with a consistent level of expense reimbursement. Ideally, companies can select a set of funds without any reimbursement for administration included, and instead, deduct the fees needed to cover administrative expenses equitably across all fund options. This ensures that each participant is paying the same percentage of their account towards administration. According to Aon Hewitt research, 10 percent of employers charge administration fees specifically as a percentage of their account balance, while 25 percent add administration fees onto the fund's expense ratio.
- For a per-participant approach—where all participants pay the same dollar amount towards administration regardless of plan balance or asset allocation—employers should use an investment lineup that does not provide expense reimbursements but rather, applies a discrete fee to participant accounts on an ongoing basis (typically monthly or quarterly). According to Aon Hewitt, 26 percent of plan sponsors currently follow this approach, up from 11 percent in 2009.
Maintain a thorough and ongoing governance process to ensure that the plan's costs are in line with services being provided. Aon Hewitt's data shows that more than 82 percent of plan sponsors currently assess their total plan cost at least every year; the allocation of administration fees could be a natural extension of that process.

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About Aon Hewitt
Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit www.aonhewitt.com.

About Aon
Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.

[1] Example assumes beginning pay of $75,000 with a salary growth rate of 3 percent. Starting account balance is $0; with the employee and employer each saving at a rate of 6 percent per year. The compound annual growth rate is 7.75 percent vs. 8.00 percent.

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