One of the biggest challenges plan sponsors face is determining their 401(k) plan’s total cost, including the cost of investment management, plan administration, and participant services. Fees and costs associated with a retirement plan’s investments are inevitable. However, ERISA requires that any compensation paid to any service provider — including an investment provider, manager, or adviser — be reasonable.
Plan fees and expenses generally fall into three categories:
• Investment management. A 401(k) plan’s most significant expenses are typically associated with managing plan investments. Investment management fees generally are based on a percentage of assets invested and deducted directly from investment returns.
These fees can vary widely, depending on the investment manager and the nature of the investment product.
The fees are also the most manageable and predictable costs to reduce, since employers can choose from multiple funds. Making relatively small changes in this area that can make a big difference in an employee’s accumulated wealth.
• Plan administration. Day-to-day operation of a plan involves expenses for basic administrative services — such as recordkeeping, accounting, legal and trustee services — that are necessary for administering the plan as a whole.
One-time fees are typically related to start-ups, conversions and terminations of service. Ongoing fees include recurring expenses relating to continuing plan operation. Administrative costs may be deducted directly from investment returns, borne by the employer or charged directly against the assets of the plan. Some 401(k) providers bundle trustee and administrative costs into investment management fees, making them appear to be free. Ask your plan provider for a breakdown of those fees. Even if employers are not directly paying for trustee and administration costs, it does not mean that 401(k) plan services are priced competitively.
• Participant Services. There may be individual service fees associated with optional features offered under an individual account plan. Participant service fees may be charged separately to the accounts of those who choose to take advantage of a particular plan feature, such as taking a loan from the plan or executing participant investment directions.
Other fees may be linked to specific types of investments, particularly mutual funds. Revenue sharing occurs when a fund makes payments to a broker for the expenses it incurs to sell shares or provide other services. While these payments are frequently labeled “reimbursements,” they nonetheless give the broker a greater incentive to sell the shares of that fund. Be sure to investigate these so-called hidden costs:
• Commissions (loads) are basically transaction costs for buying and selling shares. Ask your provider who receives these “finder’s fees” for placing money in the fund or other investment, and what benefits they continue to receive.
• 12b-1 fees, also called distribution payments, are annual fees charged by most funds to pay brokers’ sales commissions, advertising and promotion expenses and costs related to account services. The 12b-1 fee is generally paid out of fund assets. You should have signed a disclosure form detailing the basis points charged as a 12b-1 fee for each fund in your plan.
• Sub-transfer agent fees are earmarked to pay the provider for participant servicing work it does on behalf of the fund. They are expressed either as a percent of assets or as a per-participant fee. You need to know if providers are receiving sub-transfer agent or shareholder servicing revenues, and if so, if the revenues are offset against the costs as described in your service agreement. Check to see if you have signed a disclosure form that specifies each type of fee.
Plan sponsors should ask providers for an annual written statement describing all compensation — both direct and indirect — the provider receives for plan services. With these figures in hand, compare with other funds. Consistently monitor plan fees and expenses to determine whether they are fair in view of services received. You should also periodically monitor asset-based fees. Fees can grow with the size of your plan’s assets, regardless of whether you receive any additional services.
Part of a plan fiduciary’s duties involves carefully evaluating plan fees and expenses. You can help fulfill your fiduciary responsibility by going through the process. And plan participants will have more financial security in retirement.
Hantzmon Wiebel’s dedicated employee benefit plan audit team can identify plan inefficiencies and offer ways to improve plan operations, processes, and systems. Contact us today to determine your next steps.
Calculating 401(k) Fees
Asset-based — Linked to amount of plan assets, expressed as percentages or basis points.
Per-person — Tied to the number of eligible or actual plan participants.
Transaction-based — Linked to a specific service or transaction.
Flat rate — Fixed charge that doesn’t vary with plan size.
© Copyright 2021 Thomson Reuters.
Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.