Clarity around fees is a major concern for retirement plan sponsors, given their fiduciary obligations to participants. To that end, periodically benchmarking the fees and services associated with the plan is key. Here’s a helpful breakdown of the types of fees to look for when assessing the reasonableness of costs associated with the plan.
What Are You Paying?
Before comparing what your plan is paying with what other plans of similar sizes are paying, it’s of course necessary to understand exactly what you are paying, which can be easier said than done.The Department of Labor (DOL) publication, A Look At Plan Fees, offers a helpful place to start. Essentially, there are three categories of 401k fees:
- Administrative fees: Include customer support, recordkeeping, and legal services. Depending on your plan, employers may cover 401(k) administration costs, or you may pass them on to employees as flat fees or as a percentage of the assets in the plan (which makes plan sponsors liable for these fees).
- Investment fees: Charged to plan participants as a percentage of fund assets. Plans can invest differently, including managed investment funds (although mutual funds may be more cost-efficient than target-date funds). Because expense ratios cover the operating costs of funds relative to a participant’s assets, it’s wise to consider low-cost funds and watch out for hidden fees….
- Transaction fees: Some providers charge plan participants fees for utilizing specific plan features such as loans, hardship withdrawals, financial advisory services, and more. Individual service fees can reach up to $500 per transaction, depending on the reason—although some providers don’t charge any transaction fees.
With clarity on plan fees in hand, benchmarking the costs of the company sponsored plan against the field becomes relatively straightforward, and there are tools available to assist. For example, many plan sponsors find the 401k Averages Book a useful resource for determining if the plan fees are above or below what is typical. According to the 401(k) Averages Book, for instance, “the average expense for 25 participants and $250,000 in assets is 1.64%….” As retirement industry experts underscore: “Fees shouldn’t be overlooked! They may be buried in your statement and seem like a small percentage—but over time, can add up and make a big dent in account returns.” When benchmarking plan fees, it’s a good idea to keep these additional pointers in mind:
Evaluating performance of investments can be another part of benchmarking due to fiduciary duty. Plan asset growth and average account balance can be two indicators of plan design. The goal of any retirement plan is to provide adequate retirement income—and if a plan is not growing, it may be time to look under the hood. In theory, you can—and should—benchmark each year. In doing so, you can help ensure you’re doing your due diligence as a plan sponsor. Understanding and evaluating plan fees, investment expenses, investment options, and services is an essential fiduciary responsibility—and according to the Department of Labor, it’s an “ongoing responsibility.” Participants must receive information about fees and expenses before they first direct their investments in the plan.
Further Help For Plan Sponsors
As a fiduciary, remember that benchmarking alone is insufficient toward fulfilling your obligations under the high standards of ERISA law: you must also act decisively if the fees and services are not in the best interest of participants working to build retirement savings. Documentation of both the benchmarking process, and the resulting decisions and actions is also essential. Be careful: navigating the complexities of ERISA–and related litigation–brings up challenges all the time, and seemingly small oversights can result in costly disruptions to businesses. In fact, the average ERISA claim costs businesses like yours over $1.2 million in legal fees.
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Friendly Reminder
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