Just as employees need to keep an eye on how 401(k) fees are affecting their nest eggs, companies should monitor the fees they pay to offer these plans.
Thanks to Department of Labor disclosure regulations that took effect in 2012, businesses can keep a better handle on their 401(k) fees. In fact, it’s their fiduciary responsibility as plan sponsors to understand the services being provided and make sure the fees they are paying — and those they are passing on to employees — are reasonable.
If you haven’t reviewed your plan recently, now’s a good time to do so considering fees continue on a downward trend.
With today’s greater focus on transparency, “you have a greater focus on levels of fees,” says Ross Bremen, a partner at Boston-based NEPC, an investment consulting firm. In addition, “there’s a lot of well-publicized litigation [related to retirement plans] over the past decade, which has put a spotlight on plan fees,” he says.
Fees coming down: This has all contributed to driving fees down. Median estimated plan fees — the total cost to provide and administer a plan — went from 0.46 basis points in 2015 to 0.43 basis points in 2016, meaning 43 cents for every $100 in fund assets, according to a recent NEPC survey of 117 defined contribution plans, the majority 401(k)s.
Bremen had thought fees might stabilize this year, noting they can only decline so much before they reach a point where “service levels could suffer.”
To be sure, fees must be part of the conversation, but not the only focus. “To the extent it becomes all about fees, that could lead to poor outcomes,” says Lori Lucas, leader of the defined contribution practice at Callan Associates, a San Francisco investment consulting firm.
Fees aren’t everything: The focus should be on what’s in the best interest of participants, she says. With that said, fees can vary greatly depending upon the level of service provided, she notes.
Employee Fiduciary LLC, a Mobile, Alabama, 401(k) provider to small and mid-sized businesses, recently studied the service provider fees and investment expenses — “all-in fees” — of 121 401(k) plans with less than $2 million in assets. It found the average all-in fee for these plans — delivered by 22 different service providers — was 2.22 percent.
Employee Fiduciary says its own all-in fee is 0.46 percent. That does not include a financial adviser, and CEO Eric Droblyen says “the fact that we are online does help.”
If you’re looking for a breakdown of your fees, it can be found in the 408(b)(2) form issued by your service provider, says Steven D. Brett, president of Marcum Financial Services LLC in Melville.
Fees cover plan administration, record keeping and investment management, he says. For more on fees see nwsdy.li/fees.
Brett suggests companies look at two to four 401(k) service providers side-by-side to compare services and fees. “Ask for all the fees spelled out in terms of how much they are charging, where it’s being allocated and for what services,” he says.
A good portion of the cost of the 401(k) is the fund expense within the plan, essentially how much the mutual funds are charging to manage the assets within the funds, says Craig Ferrantino, president of Craig James Financial Services LLC in Melville.
He suggests choosing an “open architecture” plan with diverse mutual and exchange-traded funds, as opposed to a plan limited to funds from one provider’s family of products.
This offers more diversity of fees because participants can choose funds with lower cost structures, Ferrantino says.
And if you don’t understand the 408(b)(2), ask your provider for the “all-in” fee.
“Keep asking questions,” Droblyen says.
WHAT TO EXPECT
401(k) fees should be:
- Well monitored and documented
- Compliant with 2012 DOL fee regulations
- Well communicated to participants
- The lowest possible
- Equitable (e.g. shared equally by all plan participants)
Source: Callan 2016 Defined Contribution Trends Survey