Options for 401(k) plans get more affordable

NEW YORK -- As employers prepare for new federal rules requiring them to explain how fees affect 401(k) returns, industry providers are rolling out better, lower-cost plans.

The Department of Labor rule "is a big driver of change," says Mike Alfred, CEO of BrightScope, a provider of independent retirement plan ratings and investment research. "Everyone recognizes that fees will be under the microscope."

The new plans are aimed at helping small and midsize employers, which in the past have been unable to offer their workers the lowest-cost plans. Their workers make up 43% of all plan participants, according to BrightScope.

Participants in plans with total assets of $1 million to $10 million typically pay more than twice the amount of fees paid by participants in plans with more than $500 million in assets, an Investment Company Institute fee study found.

Charles Schwab last week launched a 401(k) plan, Index Advantage, that will provide low-cost, personalized index funds to midsize plans. The new plan could reduce costs by about 50% from traditional plans.

Schwab's plan will also automatically enroll participants in an independent advice service. "Participants are saying, 'Do it for me and make it easy,' " says Jim McCool, executive vice president and head of institutional services at Schwab.

Factors such as the individual's age, income and life changes will be used to develop an individualized plan that will be fine-tuned and rebalanced every year.

Other providers have already started offering more-affordable plans. In November Lincoln Trust, a 401(k) plan provider, launched Advantage Plan, a low-cost 401(k) plan for small employers.

Many smaller employers want someone else to be responsible for selecting, monitoring and replacing investment options. Lincoln Trust says Advantage Plan offers that type of support for a fraction of the typical cost.

Some plan providers for the small and middle market, such as Lincoln Trust and Verisight, don't provide their own products. And they say that makes their fees more transparent.

Because providers traditionally have priced 401(k) plans based on the total size of assets, the fees were lower for large plans. Today the providers that focus on the middle market are starting to change their models and some are pricing per participant, says Greg Tschider, Verisight CEO.

Among other changes, Schwab is planning to introduce in 2013 a different version of Index Advantage that will use only low-cost exchange traded funds. ETFs have lower costs than a comparable mutual fund, Alfred says.

But because ETFs trade in real time during the day, most other large providers do not include them in their core 401(k) plan investments. Fidelity's plan participants can invest only in ETFs through its self-directed brokerage option.

Unless the starting date is changed, participants will begin receiving new fee information after May 31.

"That will help level the playing field for the small end of the market," McCool says. "And we're trying to accelerate the changes that are happening."