Regular monitoring keeps 401(k) fees in check

Retirement plan fees and hidden costs can affect an employer’s ability to offer a 401(k) plan and can negatively impact plan participants’ retirement savings, but even with recent fee disclosure rules, it’s still very difficult for plan sponsors to know how much they are paying for their plan.

Fee disclosure rules that were implemented in 2012 helped bring 401(k) plan fees down, but there’s still more that can be done when it comes to designing a new plan or revamping an old one.

Laura Patton, director of human resources for the Mortgage Bankers Association in Washington, D.C., acknowledges the challenges benefit decision-makers face with respect to 401(k) plan fees. She conducts a full cost analysis on her organization’s plan each year, in part to help ensure plan fees are kept in check.

“With that we look at benchmarks within the industry, the total cost of the plan vs. peers within our trade association world and making sure we’re on par with where things should be,” she says.

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When Patton gets the analysis back, she works with her plan’s provider to negotiate any high fees down.

“We’ve been very successful in doing that each year. It does seem like it would be a lot of work, but our advisory firm is fantastic and they take a lot of the burden on themselves,” she says.

Patton uses an independent firm to help her with the benchmarking process and she also relies heavily on her organization’s independent advisory firm.

Some fees worth it

The two biggest fees that retirement plans pay out are those related to investments and administration.

“Fees pay for services. If they are warranted and worth it, then they are a good thing,” says Brooks Herman, head of data and research at Brightscope in San Diego. “That means engaging plan participants in their 401(k) plan and getting them to retirement. You don’t want to waste services.”

Also see: 5 fee-related best practices for 401(k) and 403(b) plans

Plan sponsors should evaluate their retirement plans on a regular basis. That means sending out a request for proposals for new services, recordkeeping, consulting and auditing to get the best pricing for those services, he adds.

Part of an employer’s fiduciary duty to employees is actively monitoring the plan and making sure the cost for services is reasonable.

Fees for services in a 401(k) plan are not all bad. The key is to only pay for services your plan participants need and will actually use, says Herman.

Robyn Credico, defined contribution practice leader North America for consulting firm Towers Watson, believes plan sponsors should conduct a fee benchmarking study every three years. “If you haven’t done it, do it now. Do a fee benchmarking study which would look at your plan and compare the administrative fees, investment fees and total fees of your plan to plans that are similar to yours,” she says.

Companies want to compare themselves to similar plans because “there is not one set of pricing for anything so when you look at your plan on the recordkeeping side, look at number of participants, complexity and services offered,” she says. “On the investment side, if you are using index funds vs. active funds, there will be a big difference in pricing.”

Hire a good adviser

Even with fee disclosure rules, it is sometimes very difficult for plan sponsors and plan participants to know what they are paying in fees. Fee disclosure documents can range from two pages to 48 and most do not include a roadmap to locate the fees.

That’s where a good adviser can come in and earn their keep, says Kelly Amato, director, retirement plans at NFP. This role is even more critical for small 401(k) plans because the person in charge of the plan usually wears numerous hats to keep the business moving forward and may not have time to do due diligence.

An adviser can quantify the investment-level expenses a plan is paying, she says.

“The confusing part is that the investment management and recordkeeping can [overlap] when it comes to what revenue the recordkeeper requires to make the plan profitable and what investments can be offered to support the cost structure,” Amato says. “What we try to do is break down the walls to a certain extent, getting clear feedback from the service provider about what they need to make the plan a success.”

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Providers over the last 18 months to two years have had to work hard to understand which clients are profitable and why.

“I suggest that plan sponsors have more power than they believe they have or more leverage to at least open a dialogue. With the right amount of data and research they are able to make a good case for lower fees rather than [simply say] ‘We just need lower fees,’” Amato says.

It is important to bring a plan’s service providers back together every year to “document what services they have done and what costs are reasonable for it. If there is a big difference, that would prompt another benchmarking,” she says.

If employers haven’t shopped for a new plan within the past five to 10 years, Credico recommends doing a full vendor search.

“It doesn’t mean you have to leave your existing recordkeeper, but you are likely to get pretty competitive bids. I recommend doing thorough due diligence and a full-blown RFP,” she says. “Do an investment structure review to make sure you not only do have the right funds for your plan but that you’ve got the most cost-efficient solution.”

In light of recent lawsuits related to breaches of fiduciary duty, employers need to evaluate what their existing plan offers and see what else is out there.

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Julie Gallion, senior HR consultant and benefits practice lead for Nonprofit HR, says that the whole idea of looking at fees and fee disclosures is relatively new in the 403(b) retirement space and many of her company’s employer-clients don’t know what they are looking at or know how to interpret the statements.

“The one thing I’ve learned working with various types of retirement plans is you get what you pay for,” Gallion says, citing low-cost as an example. “They offer low-cost retirement plans, but they are very bare bones,” she says. “They don’t offer one-on-one support for the employer or plan participants.”

At least in the 403(b) world, it is still relatively difficult to compare one company’s fees against another because the data is not out there, Gallion says. She relies heavily on reports from the Plan Sponsor Council of America, which does an extensive report on 403(b) plans annually.

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Another way to lower plan fees is to shop for service providers outside of the plan’s local area, suggests Andrew Meadows, consumer and brand ambassador at Ubiquity Retirement + Savings.

Most people don’t feel compelled to visit their 401(k) plan administrator in person, so there is no need to pay higher fees to a local company. He recommends that employers explore other options, including national and online providers.

“If you are not an investment-savvy individual, look for people to take over the fiduciary responsibility and the education piece. It might drive down costs as well,” he says.

Registered investment advisers charge a flat fee rather than take a percentage of the plan’s assets, like a registered representative.

“Registered reps work for the fund companies so they might have more biased opinions,” says Meadows. “RIAs are fee for service and might give you better advice so you get more bang for your buck.”

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It is very important for employers to know what the goal of their retirement plan is before designing it. If it is to attract and retain good employees, offering a company match or profit sharing may be important design elements.

“If you want to set up a plan so you, the owner, can maximize your contributions, a match or profit sharing is not your goal,” says Meadows.

How the plan is set up can cost the employer more money upfront. For instance, many companies allow employees to participate in the company 401(k) plan immediately instead of waiting for a couple of years.

Most providers will charge a fee per participant. Employers might want to exclude seasonal or part-time workers from the plan. They can do this by including a 1,000-hour service limit for eligibility to participate in the plan, Meadows says.

Vesting schedules are also important. Today’s workers are transient, with many not staying in the same job for more than five years. Meadows recommends implementing a five-year vesting schedule where employees earn 20% every year. If they leave before the five-year vesting period, they would only get 60% of their company match. The company would retain 40% of that contribution in a forfeiture account.

“There is hidden money in a 401(k) plan that you can use. Look at the forfeiture account periodically so there is not as much out-of-pocket expense for profit sharing and administration fees. If your business is slower, use that money to help float the 401(k) plan instead of paying out-of-pocket every quarter for that,” Meadows says.

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“Make sure that what you are paying benefits the right people,” Credico says.

For example, if a company has a lot of people who only stay three or four months, it doesn’t make sense to auto enroll them in the retirement plan.

“It doesn’t help the greater good because they will take their money and not save it going forward,” she says.

Paula Aven Gladych is a freelance writer based in Denver.