Yes, it’s true. Some costs are trending down—and that includes investment fees for retirement plans: they have been declining over the past six years. 2022 was no exception. Explore the trend, and pause to make sure your plan is not overpaying—that’s a fiduciary obligation for plan sponsors.
Averages?
The 2022 data for the 401k Averages Book has recently been released and confirms the sixth year of a downward trend in retirement plan investment fees:“total fees for 401(k) participants fell to .02% from .05% in 2021.” Plan Sponsor further reports that the expenses incurred by participants related to mutual fund investments (“the most popular investment vehicle”) also continue to decline: there’s been a drop from 0.77% in 2000 to the current average expense of 0.36%. Experts point to the important role “plan sponsor and adviser fee awareness” has played in creating “an environment where investment managers had to make new, lower-cost-fund share classes and CITs available to plans.” According to the author of the Averages Book, Joseph W. Valletta, the biggest driver of declining fees is the “uptick in 401(k) investments being put into lower-cost-fund share classes and collective investment trusts, which also tend to carry lower fees as pooled investment vehicles….”
Of course lower investment fees are a good thing—they result in more money for retirement plan participants, especially when added up over time. Although the investment fees for large plans have declined the most, smaller retirement plans are experiencing reductions too, as summarized by Plan Sponsor:
…Smaller retirement plans—defined as 50 participants or about $5 million in assets—had, on average, higher-percentage fees than larger plans, according to the 401k Averages Book. Small retirement plan fees declined from 1.12% to 1.09% over the past year and are down from 1.18% in 2017.Meanwhile, large-retirement-plan—1,000 participants or $50,000,000 in assets—fees declined from 0.88% to 0.85% over the past year and are down from 0.95% in 2017, according to the 401k Averages Book. “We are encouraged to see fees continue to decline for participants in small 401(k) plans. Small business employers have a lot on their plate with deciphering [the] Secure 2.0 [Act of 2022], but small tweaks to their plan’s investment menu and fees can generate significant savings for their employees,” Valletta says.
Understanding and Acting on Fees
ERISA experts at JD Supra remind plan sponsors to dig into the details of retirement plans—and this includes understanding the performance and fees associated with investment options, as well as properly recording the prudent process used when making these assessments. Examples of allegations against retirement plans and their fiduciaries, as noted by Pensions & Investments, include:
- Failure to monitor the performance of investment funds in the plan
- Consistent underperformance of funds against benchmark indexes
- Use of more expensive funds—although the marketplace for plans of a similar size has plenty of lower cost and better performing funds
Regularly benchmarking investments and fees is an example of how plan sponsors can demonstrate prudence in their fiduciary duties. In addition to excessive fees, ERISA lawsuits are also occurring over fiduciary failure to act when funds are shown to be performing poorly compared to their “peer universe.” Sponsoring a “smaller” retirement plan is not protection from such law suits: the precedents set in cases involving larger plans are resulting in copy cat cases against smaller businesses and their retirement plans. A harsh reality for plan sponsors is that even with great diligence, errors and oversights occur, and under the high standards of ERISA law, mistakes can result in fiduciary breach allegations.That’s why it’s critical for plan sponsors to protect themselves from personal liability. Colonial Surety is here to help with an affordable Fiduciary and Cyber Liability Insurance Package that includes:
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