I recently held a special meeting with employees of a larger firm who wanted to learn about their company’s retirement plan fee structure and how these fees affect their savings. This is a hot topic for plan trustees and employees alike – meeting after meeting 401(k) fees specifically come into focus.
While a plan’s investment fee structure is now readily available via required annual notifications to employees, they don’t make for the easiest reading. So let’s cut to the chase here: There are five main areas I find crucial in looking “under the hood” to see the total cost structure of these plans.
- Plan Administration and Recordkeeping Services – these fees are associated with the operational functions of running a 401(k) plan (e.g. website technology, recordkeeping platforms, call centers, quarterly statement mailings, nondiscrimination testing and Form 5500 filings). A plan sponsor can pay these fees directly or deduct them from a plan’s assets.
- Investment Expenses – a mutual fund’s expense ratio expresses its management fees and operating expenses as a percentage of its net assets. Typically, more aggressive funds have higher expense ratios. Shown in conjunction with a fund’s share class, these are an important component of meaningfully comparing 401(k) plans. Participants typically pay these fund expenses.
- Investment Advisory Services – most 401(k) plans have a broker or advisor who oversees the investments offered within a plan. A typical plan investment advisory fee is 0.25% of plan assets, but this fee varies greatly depending on the level and scope of the advisory services. In most cases, these fees are deducted from total plan assets, but sometimes a plan sponsor pays them directly.
- Processing Fees for Loans and Distributions – transaction fees usually apply when an individual requests a plan loan or distribution. Common fees include distribution fees of $75 and loan fees of $100 (along with a loan maintenance fee of $50 per year). Plan sponsors normally pass these fees on to the individual requesting the loan or distribution from a plan.
- Plan Audits – The law requires plans with more than 100 eligible plan participants to conduct an annual independent financial audit which can range in cost from $10,000 to $20,000 per year. Since this is a mandatory requirement, a plan normally bears this cost.
Working closely with your trusted 401(k) plan advisor, you may wish to benchmark your plan to both industry averages and size averages to ensure that your plan is on solid footing in terms of overall plan expense.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through Global Retirement Partners, LLC, a registered investment advisor. Global Retirement Partners, LLC, Frenkel Benefits – an EPIC Company, and LPL Financial are separate and non-affiliated companies.
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
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