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Are Your 401(k) Fees “Reasonable?” Benchmark Them to Find Out

Are Your 401(k) Fees “Reasonable?” Benchmark Them to Find Out

| September 28, 2017
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How to assess your retirement plan fees and make sure that your plan fees are appropriate.

All plan sponsors should review their retirement plan fees on an annual basis. Fees are continuing to drop with the average total cost for large retirement plans (1,000 participants plus) positioned at around 1.03 percent. In conjunction, 50 participant plans, typically with $500,000 in assets, might have a fee in the range of 2 percent to 2.25 percent. To ensure the best interest of the plan, the sponsor should either negotiate lower plan fees with the current provider or potentially go through an RFP process with the purpose of moving the plan to a different provider. With so much emphasis on plan fees, it’s become important to do this type of review.


Cost observations

It’s not uncommon today to find that plan participants and plan sponsors don’t fully comprehend their fees and how those fees came to be. In a study done by Deloitte, 19.4 percent of plan sponsors admitted that they didn’t know what portion of the funds pay revenue sharing (essentially a credit from the investment fund built inside the fee in order to subsidize the cost of the plan). In the same study, 37.5 percent of plan sponsors said that they didn't know if there was any kind of credit revenue paid back to those participants or whether or not the record keeper was actually keeping those revenue credits for themselves.

Pricing is going to vary significantly based on plan assets, the number of participants, the average account balance and the service requirements inside the plan. Questions that might be helpful when determining the direction of costs are:

  • What type of services are you requesting?
  • Are you looking for a bundled or unbundled administration services?
  • Are you looking for enhanced education services?
  • Are you looking for self-directed brokerage accounts?
  • Are you looking for more fiduciary risk management?

Anything as an added feature can elevate the cost of the plan including more automated features like auto disclosures, payroll integration, etc.


Monitor Investments

Recent fee litigation and regulatory updates are focusing on key litigation cases. There's a number of them out there that are being reviewed. Most notably Tibble v. Edison International and Tussey v. ABB, Inc. These cases are laying the groundwork towards an effort of being more educated and responsive in evaluating your plan fees as a plan sponsor. 

A fiduciary plan sponsor must act in the best interest of the plan. That means they need to take a critical approach towards reviewing planned fees. They need to review those plans fees either through the utilization of an outside consultant or on their own. But the process should be very comprehensive. It should include various providers and various proposals and it should be reviewed for multiple areas, not just price but also making sure those record keepers provide good service, good investment options, flexibility as their plan grows and as services for their participants.


Components of plan costs

The components of plan costs are investment fees, admin fees and plan consulting fees. The investment fees are really the only costs associated with managing investments. Typically, these are always paid for by the plan participant. With admin fees, these are services to run the plan essentially. That includes your administration, your compliance, your record keeping, your trustee service and typically these types of fees could be paid either by the plan sponsor or the participant or both. The advisory fees and consulting fees can be paid by the plan sponsor or the participant.

A fund or an investment typically breaks out internal fees through the expense ratio. An expense ratio is the operating expense of that fund. The components of that are the investment management fee, the 12B-1 Fees, the shareholder servicing credit and any sub-TA or agency transfer fees for any kind of sub-accounts that might be built into the plan.


Picking your share class

It’s important to make sure that your share class is an appropriate fit for your plan. Looking at the share class of these funds matters deeply. At the end of every fund, you’ll commonly find some type of letter which is indicated by share class (R3, R4, R6 for example). This is representative of how much that fee costs and how much the expense ratio of the fund is. The management and name of the fund are the same but they differ by expense ratios. Typically, the higher share class like an R6 will represent the lowest expense ratio of the fund. Inside of that expense ratio, it’s important to review the revenue sharing inside of that expense ratio which goes towards potentially paying plan cost or other administrative costs in the plan.

An R3 share class is typically a higher share class fund option. R3 includes fees to the investment manager for the purpose of administrative expenses and for the purpose of paying out consulting fees.   


Benchmarking versus RFP

So, what is in the process of reviewing and going through a benchmarking exercise? Well, there are essentially two types - benchmarking or the RFP process.

When you benchmark you’re agreeing to stay with your current provider and attempt negotiating lower fees. This is done by looking at the investment lineup - maybe enhanced services offerings, maybe even adjusting your share class to a lower share class option. 

When you go through the RFP process you're considering a new provider and want to see who else can be competitive with your plan. You would typically go out to an expanded list of providers who would provide a qualitative analysis on your plan and a comparison on how they could provide you with their best in class offering and pricing. The process might also include; a finalist presentation; web demos for the participant and plan sponsor site, payroll integration review, compliance review and an assessment of other value-added services that could be provided. 

Again, fees are important but sometimes by picking lower fees and lower plan costs you might be giving up services in the compliance arena or in the record keeping area or in technology or in communication or in education or investment selection. It’s important to make sure that those services are important to you and what's involved in picking a provider with just the lowest cost versus picking one in the middle cost range.


Going to market – the 5 phases

If you do decide to go to market in an RFP process you want to be sure that you do so in a strategic manner. The steps can be broken down into a 5-phase process.

Phase 1 - The initial discussion with your adviser and determining what's important to you. You do need some information in order to go out and get bids. Typically, the demographics of the plan, asset allocations, plan documents, your current services that are being provided to you and your employees, your current expense structure and then a recent 5500 filing are items that are required to get formal proposals.

Phase 2 - Going out to market to gather RFPs. Choose your options based on your current and future needs, service, investment options, administration features, compliance oversight and payroll integration. There are many providers so pick wisely.

Phase 3 – Providers submit their quotes and proposals. An analysis report is created with the requested service providers submitting their proposal pricing information for review. The cost analysis will be comprehensive and should show you side by side comparison of fees, funds and service and administration features.

Phase 4 - Final presentation of your RFP analysis is completed. The report should give you a good assessment of the bidding providers offerings in a manner that is simple to understand and backed up by formal RFP proposals from the bidding providers.

Phase 5 - Final decision and starting your conversion process. The results from the RFP process should really give you an understanding of the overall fee savings for your participants not just one year but over two years three years five years and 10 years and how that will affect them as you continue to grow your plan.


The goal of all this is to benchmark your plan for understanding what your plan fees are and how they are paid for.  Act today to review your plan fees. This will address a fiduciary requirement and help educate the plan committee on the plans competitiveness and effectiveness. Make sure that you get a completed transparent fee disclosure from all service providers and that you understand your fees. It’s crucial to understand how the services relate to the fees and how it's beneficial to your participants and their retirement success.



For Plan Sponsor Use Only - Not for Use with Participants or the General Public Investing in mutual funds involves risk, including possible loss of principal. 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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