Are Your 401(k) Plan Fees Reasonable?
Administering a 401(k) plan for your company is not an easy job. There are a host of requirements that you as a plan fiduciary must comply with. One of those key requirements is to ensure that any fees associated with the retirement plan be considered “reasonable” — a key component of the fee disclosure regulations finalized in 2012.
Determining if your fees are reasonable can be a subjective exercise. Different service providers offer different types and levels of services. This can make it difficult to really perform an apples-to-apples comparison. To further complicate matters, service providers can charge fees in very different ways. Therefore, you must first understand how your service provider collects their revenue.
One method of determining and collecting fees — and perhaps the most difficult and least desirable method —is to collect all or most of the fees through revenue sharing from the mutual funds. By default, this is an asset-based charge, which means the fees collected are a percentage of assets. The challenge with this method is that plan assets grow over time, and while .25% of assets seemed like a reasonable fee when your 401(k) plan contained $8 million, it may seem more exorbitant when your plan reaches $10 million, or more.
For this reason, it is important to work with vendors who provide transparent pricing. Most service providers may have some component of their fees as an asset-based fee, but it should include some hard dollar fees that reflect the true cost of their services and adjusts as your plan grows larger.
Once you determine how your service providers assess their fees, you can then begin the process of evaluating if they are reasonable or not. One of the more common ways of doing this is through benchmarking, which involves either going through a formal RFP process, or gathering 3-5 proposals from other vendors. By working with a reputable advisor, they can quarterback this process for you. If not, you will be left to conduct this analysis on your own. The Department of Labor (DOL) does provide some worksheets and checklists on their website to help you.
Once you gather the proposals, you will then need to evaluate what services each vendor provides and how much they charge for it. If your current fees are substantially higher than the others proposals, some investigation will be needed to find out why. This could provide leverage to take to your current provider and get them to lower their fees. However, as the DOL mentions on their website, cheaper is not always better. Remember, service providers are performing a valuable service, and sometimes you get what you pay for.
The good news is that over the last 3 years since the fee disclosure regulations were finalized, fees have come down. So, if you haven’t benchmarked your plan in the last 3 years, this would be a good time to do so. It is recommended that you perform this exercise at least every 2-3 years.