Today, 401(k) plans are the only savings vehicle for many Americans. As a plan sponsor, you are helping your employees save and prepare for a secure financial future retirement. This is an important job and one that includes several fiduciary responsibilities. One of the most vital is ensuring plan fees and expenses are reasonable and competitive.
Depending on your arrangement, you pay a single plan fee to a single provider (bundled arrangement) or you pay separate plan fees to a variety of providers (unbundled arrangement). Typical plan fees fall into three categories:
1. Investment: Money management and other investment related expenses. These fees make up the bulk of plan fees.
2. Plan administration: Recordkeeping, oversight, advisor services, and other service provider expenses.
3. Individual service: Participant fees for optional plan features such as loans or executing participant investment directions, etc.
Plan fees can be paid in whole or in part by:
• The employer
• A direct charge against the assets of the plan
• Participant account deductions
Here are the top four reasons you need to understand your plan fees and expenses:
1. Fiduciary duty. No matter what your arrangement, ERISA requires plan fiduciaries to understand plan fees, evaluate their reasonableness using a prudent process, and monitor them on an ongoing basis.
2. Plan participant communication. A fiduciary must provide participants with all information about plan fees and expenses so they can direct their investments. Communication is required at least annually.
3. Participant account balance impact. The cumulative effect of fees and expenses on individual retirement savings can be substantial so it’s important they are reasonable. According to the Department of Labor (DOL), a one percent difference in fees and expenses over 35 years can reduce a participant’s account balance by 28 percent at retirement.
4. Lawsuit concerns. Lawsuits over excessive fees are a reality. A recent example is Tussey v. ABB, Inc., which cost the company $13.4 million for failing to monitor recordkeeping costs. Clearly, you want to ensure your plan fees are fair and reasonable. Otherwise just one participant who is unhappy with the fees could result in a major hit to your business.
The bottom line is all services have costs and it’s important to understand them. What matters most is that you make prudent decisions regarding plan fees and expenses and document your evaluation process. Make sure there is value for services delivered and then regularly monitor fees to see they are in line with industry standards. Remember, cheaper is not always better.
For more information on how to evaluate plan fees and services, take a look at the DOL Checklist.