Years ago, you decided to set-up a 401(k) plan for your company as a means for you and your employees to save for retirement. So you hired a team of service providers and agreed to the various responsibilities and fees associated with operating a 401(k) plan. Once the plan was established, you put it on cruise control and haven’t looked back since. Times have changed though and if your fees haven’t, you could be over-paying.
What are 401(k) fees?
There are two types of fees associated with operating a 401(k) plan – administrative fees and investment fees. Administrative fees include the costs for recordkeeping, accounting, legal, and trustee services. Investment fees include the costs of managing the underlying funds available in the plan and investment advisory services.
While the internal costs of the underlying investment options must be paid by participants, the remaining fees can be paid by the employer, the employees or a combination of the two. More often than not, it’s a combination – the employer pays some fees and the employees pay others. Nevertheless, regardless of who is paying the fees, it is part of the employer’s fiduciary responsibility to ensure both the administrative and investment fees are fair and reasonable.
How do I know what’s fair and reasonable?
Benchmarking is one of the most effective methods of determining whether or not your plan’s fees are fair and reasonable. By comparing your plan’s fees with those of similar-sized plans offered through other companies in your industry, you can identify if you are overpaying in administrative fees, investment fees or both. Benchmarking your fees on an annual or even semi-annual basis is a best practice worth adopting as a plan fiduciary.
Consider getting a second opinion.
Qualified retirement plans can be complicated, and not all financial advisors are well-versed in their nuances. If you’re having trouble understanding your plan’s fee structure, consider engaging a financial advisory firm that specializes in the qualified retirement plan space and request a second opinion. Not only will this process help identify excessive fees, but it may also uncover other areas of your plan that need attention as well. As a plan sponsor, you have a fiduciary responsibility to act in the best interest of your employees. A second opinion can help you meet that responsibility by ensuring your plan’s fees are fair and reasonable, the investment menu is properly diversified and you’re receiving the service necessary to operate your plan properly.