Don’t be Haunted by Plan Fees

There are many frightening things in the world but reviewing 401(k) plan fees doesn’t need to be one of them.  During the month of October, employers sponsoring 401(k) plans may think it whimsical to look at the eerie ghosts, goblins and witches decorating public spaces but shiver at the specter of the U.S. Department of Labor and its strict requirement that 401(k) fees be reasonable.

Don’t let plan fees scare you.  Exorcise your fear by understanding the services performed by your service providers, how your providers are paid, and what their fees are.  Then look at the fees charged by other providers to plans of a similar size to yours. 

Keep calm throughout the process knowing that DOL doesn’t expect plan sponsors to have hired the cheapest providers.  Your analysis should conclude that fees are reasonable given the level of services received.  A higher level of service might create a better benefit for plan participants and thus merit a higher fee.  Employers protect themselves by documenting their process to evaluate fees and the basis for their conclusions.

Service Providers 

Most 401(k) plans have a Third Party Administrator, a Recordkeeper and a Custodian.  The Third Party Administrator or TPA drafts all plan documents, performs plan testing and prepares the annual Form 5500 for the sponsor’s signature.  The Recordkeeper keeps track of all plan activity, maintaining information on participants’ plan balances, investment selections and personal information.  The Recordkeeper also provides a website where participants can view and manage their accounts, as well as a website where employers submit employee and payroll information and generate plan reports.  The Custodian holds all plan assets, buying and selling investments for the plan and collecting dividends.  Sometimes these three services are bundled so that the sponsor sees only one provider, even though three separate entities are servicing the plan.

Most plans also work with an advisor.  The advisor may be a broker or insurance representative whose primary responsible is selling certain branded 401(k) plans or investment platforms.  Or plans may hire an independent advisor, who serves as a consultant, guiding sponsors in selecting funds from a variety of investment providers.  Sometimes an independent advisor also will agree to serve on behalf of the sponsor as the plan’s Fiduciary Investment Manager.  The Fiduciary Investment Manager, sometimes known as an ERISA 3(38) advisor, takes sole responsibility for selecting and monitoring all plan investments.  This highest level of service significantly reduces the potential liability of plan sponsor fiduciaries, and participants benefit from the expertise of these professionals.     

Methods of Charging Fees

Just as providers offer various levels of service, there are different ways to assess fees against a plan.  Many plans use a method called revenue-sharing.  This method hides plan fees by removing them from investment returns before these returns are reflected in a participant’s account.  A transparent method of fee assessment makes it easier for sponsors and participants to see – and understand – plan fees.  In plans assessing fees transparently, participants receive all investment returns and then have fees charged to their plan account.  Each charge is reported on the quarterly statements they receive.

To assist participants and sponsors in understanding the fees they pay and the way in which fees are calculated, the DOL since 2012 has mandated disclosures be provided.  Disclosures to participants adhere to a DOL template and must be provided annually.  Disclosures for sponsors, known as 408(b)2 reports for the section of ERISA that requires them, vary by provider with some generated annually and others presented only when contracts are signed.  Sponsors are expected to review 408(b)2 reports and understand the fees being paid to each service provider.

Comparing Plan Fees 

There are several ways to evaluate plan fees and services.  Requesting proposals from service providers can provide not only fee information but help sponsors discover additional services that might be of benefit.  A good starting place is to interview advisors; locate an advisor knowledgeable in all 401(k) areas to help you identify desirable services from TPAs, Recordkeepers and Custodians.

Fee and service benchmarking reports also can be purchased.  Firms specializing in the reports show fees paid by plans comparable to your own while detailing the services received for various fee levels.

Finally, sponsors may purchase The 401k Averages Book.  Published annually, this guide presents fee information as well as helpful tips on reading 408(b)2 reports and understanding revenue-sharing.

There’s no need to be haunted by plan fees.  October is a time to enjoy the changing season and festivities.  Documenting your understanding of your plan’s services and a determination that your fees are reasonable for these services will allow you to progress confidently toward the end of the 401(k) plan year.

This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans.  Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.