401k plan fees are the price of doing business in the retirement plan arena, both for employee participants in a retirement plan and for the company that sponsors a 401k plan.
Those fees are also crucial to both the service and investment return portions of a plan participant’s 401k experience, and their impact can be substantial.
On the plan portfolio side of the equation, high 401k fees can generate a huge dent in a retirement saver’s 401k plan asset totals.
Case in point – a valued employee at ABC Co. has 35 years until she retires and currently holds a 401k account with $25,000 on hand.
This employee can expect an average return on investment of seven percent over the next 35 years, with fees cutting into her 401k asset level by 0.5%. If that scenario holds, and even if the employee doesn’t contribute another penny to her retirement account, her 401k account total after 35 more years will stand at $227,000.
But what if the employee’s 401k plan fees were higher – say, at 1.5%. In that scenario, her account balance wouldn’t climb to $227,000 – it would be reduced to $163,000, with the one percent additional fee rate chopping the employee’s 401k assets down by 28 percent.
That scenario is playing out all over the 401k plan landscape, and it’s a big reason why fees get plenty of scrutiny from federal regulators and are regularly ranked high on the list of complaints consumers have about their 401k plans.
There is some good news on the 401k plant front. 401k fees, while tough to benchmark and often complex – aren’t significantly high as a percentage of 401k plan assets and fees are actually declining the past few years.
According to data accumulated by Morningstar, total 401k plan assets stood at $6.4 trillion in 2019. That’s up from $2.7 trillion in 2009.
Despite 401k plan assets growing, plan fees are in decline, albeit slightly. Morningstar notes that the average 401k plan fee was 0.58% in 2107, down from 0.65% in 2017.
There is some truth to the notion that the larger the 401k plan, the smaller the fee, as well. Morningstar reports that the total plan cost for 401k participation in a plan with fewer than $1 million in assets was 1.42% in 2017. Comparatively, the average fee for participating in a 401k plan with $1 billion in assets was 0.26% during the same time period.
Proper Understanding and Due Diligence on 401k Plan Fees
Even as the numbers point to a moderation in 401k plan fees, companies that offer sponsored-retirement plans still need to be vigilant about 401k plan fees – and understand what their plan participants are getting for their money.
What are the most important issues related to 401k plan fees that need to be prioritized by plan sponsors?
These duties and obligations need to come first.
Follow ERISA guidelines on plan costs. The Employee Retirement Income Securities Act (ERISA) is Uncle Sam’s guidebook on plan fiduciary obligations. In it, Congress carved out its obligations in such a way that it’s really plan sponsors (i.e., companies sponsoring 401k plans) and their plan fiduciaries and not investment managers that are held responsible for the overall health of their company plan.
This is especially true when it comes to 401k plan fees and costs.
While ERISA doesn’t mandate that companies hire the lowest-expense 401k investment provider or plan consultant, it does place a high priority on the prudent management of plan fees, as follows.
— Plan sponsors/fiduciaries are expected to fully comprehend the total cost of their company 401k plans, including how much money the company and its employees are spending on plan costs, and who is the recipient of those funds. That process is ongoing and requires a full documentation of all plan costs and fees, what services were provided and when, and all in itemized fashion.
— Companies should also regularly compare and rank 401k plan providers and other related service providers on fees and costs, study fee methodologies from plan providers relative to their peers, and track how fees have shifted over time – also relative to similar 401k plan providers.
— Plan sponsors and their fiduciaries should also regularly benchmark 401k plan provider costs and fees against plan investment performance. This activity can be undertaken as a traditional benchmarking review or steered to a full request for proposal (RFP.) With so much riding on the issue of 401k plan portfolio performance relative to fees and costs, bringing aboard a trusted 401k plan administrator for the job is strongly recommended.
Plan fee categories. Plan sponsors and their fiduciaries also need to take the magnifying glass out for the various types of 401k plan fees. Just like a large company looking to build a new research plant needs to fit costs and fees in any project management plan, plan sponsors and fiduciaries need to take the same approach on fees – and knowing which fees are which is the place to start.
In the 401k world, the primary fees fall into these categories:
Plan administrative fees. These fees cover any plan management activity that doesn’t include investment management services. Typical services provided under the plan administrative umbrella include 401k plan recordkeeping, compliance and regulatory, legal, information technology, marketing and content, and trustee services.
Professional consulting fees. Some 401k plan investment fees blend together with investment services fees, but aren’t technically “investment fees.” That’s the case with money paid to professional investment consultants (often a registered investment advisor or securities broker) who advise on broad-based 401k investment strategies and help employees get the most from their 401k plan experience.
Since consulting fees tend to cover different service provider categories, it’s recommended that companies closely review the consultant’s compensation disclosure document ask for an itemized list of services.
Investment fees. Companies must also pay fees for the investment vehicles they choose for their plan participants – usually that means mutual funds or exchange traded funds, although 401k plans can include stocks, bonds, insurance investment vehicles, investment fees may also include specific fund fees, including sub-advisory, marketing (12b-1 fees) and fund expense ratio fees (i.e., the percentage of a plan participant’s investment used to cover fund expenses.)
Investment fees are usually the biggest 401k plan fee and are usually charged as a percentage of the assets managed in a company retirement plan. Ancillary investment fees, like the 12b-1 fee, are typically rolled into the larger investment plan fee and are not charged separately.
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The Takeaway in 401k Plan Fees
This summary of 401k fees is only part – albeit a big one – of the overall company retirement fee story.
Fees can and do grow complicated, and plan sponsors are expected to keep up to speed on 401k plan fees and how they impact plan participants.
Failure to do so may lead to inquiries – and maybe even fines and penalties – from federal regulators.