There are fees associated with most services we have access to, from cell phone service to cable and utilities. 401(k) plans are no exception, and the fees associated with them cover expenses including investment management, compliance services, recordkeeping, and participant services like a call center or client portal.
Plan sponsors—organizations making 401(k) plans available to employees—have certain fiduciary responsibilities related to plan fees, namely that they only pay “reasonable” fees from assets. This makes it essential that plan sponsors understand not only what plan fees are being paid, but how they are being paid.
Not only do different plan fee arrangements have varying degrees of impact on employee retirement account balances over time, but they have the potential to either increase or decrease the risk of exposure to litigation. And as the recent swell of lawsuits surrounding 401(k) plan fees indicates, what you don’t know can hurt you*.
The following checklist can serve as a conversation guide in discussing your 401(k) plan options with an expert who can help you choose a plan and fee structure aimed at supporting your goals for your organization and your employees’ ability to plan for their financial future:
1- Understand your options
There is a wide range of fee payment options, and the term “reasonable” allows for some latitude in choosing a fee arrangement that you feel serves the best interest of your employees. The important thing is to be educated on how different payment arrangements work and how they can impact employee account balances, and to make an intentional decision about how you will allocate plan expenses.
2- Review plan fees and fee payment options regularly for competitiveness
With fees trending downwards for 401(k) plans across the board**, it is beneficial to conduct a regular review of the plan fees being paid and the arrangements in place to pay them. A review may reveal that you and your employees are overpaying, or identify a new way to reduce your plan fees.
3- Examine revenue sharing
One of the ways plan fees can be paid is through revenue sharing arrangements, whereby all or a portion of the Plan fees are deducted from employee retirement accounts as a part of the cost of plan investments. With revenue sharing, however, the fees are not always transparent or easy to understand. In certain situation, these arrangements can lead to plan participants paying an uneven share of plan fees and potentially expose plan sponsors to increased risk for litigation.
4- Maintain clear and thorough documentation
Plan fees and the way they are paid should be documented in a systematic process that supports transparency and consistency.
If you are a plan sponsor contact me for a fee review to discuss the competitiveness and structure of your 401(k) plan fees.
*Source: Bloomberg Bureau of National Affairs, ERISA Litigation Tracker (2018).
**Source: Investment Company Institute (ICI) 2019 Investment Company Fact Book.