Benchmark to Avoid Unreasonable 401(k) Fees

If you are a 401(k) plan sponsor, one of your most important fiduciary obligations is to ensure your fees are reasonable and on par with market averages, because excessive fees charged over a long period of time can severely decrease the value of a participant’s life savings over time. Excessively high 401(k) fees can also bring liability and even litigation against you and your company.

Unfortunately, the definition of “reasonable” is not clear. The Employee Retirement Income Security Act (ERISA) is quick to define who’s responsible for ensuring plan fees are reasonable, but they do not define what is considered reasonable fees for your plan. The Department of Labor (DOL) advises plan sponsors to implement a documented and objective process to show decisions are being made in the best interest of the plan participants and beneficiaries. This process should clearly define each fee you pay and how those fees relate to the services provided and the investment funds in your plan.

Reviewing 401(k) Plan Fees

You don’t want to wait until you have an agent from the DOL or ERISA at your doorstep to find out your 401(k) fees are too high. Unfortunately, the fees can differ greatly between providers, making it very easy for you to get overcharged if you aren’t paying attention.

One of the best ways to show you have done your due diligence is to benchmark your plan using other 401(k) providers. Having three providers benchmark your plan every two to three years is free of charge and, more importantly, shows you used a non-biased third party to benchmark your plan. Most providers will give you a very detailed benchmarking report you can file in your fiduciary compliance folder. (For related reading, see: Employer Responsibility for Pension Plans.)

What 401(k) Providers Should I Use to Benchmark My 401(k) Plan?

You should choose three providers that only charge direct provider fees. Direct fees are paid by the employer via an invoice to the company or debited from participant accounts. This is the most transparent way to show 401(k) fees. When a provider charges indirect fees it can be very confusing to know what the bottom line cost is for your plan because indirect fees may be hidden and paid from plan investment funds (revenue sharing, 12-b1 fees, annuity wrap fees, etc.). The providers that charge direct fees are not only the most transparent, they also know where to find the hidden fees in your plan and can show you a very concise (apples-to-apples) comparison for you.

I Got My 401(k) Plan Benchmarked, Now What?

There are three typical outcomes after benchmarking a 401(k) plan:

  1. You find out you are in a good place and file the report away in your 401(k) compliance file.
  2. You take the report to your current provider and possibly get some cost concessions.
  3. You determine there are more superior options available and consider making some changes to your plan.

Ensuring your 401(k) fees are in line with the current market not only potentially increases the amount going into your employees' retirement accounts, it can also keep you and the company from being held liable or taken to court over unreasonable fees.

(For related reading, see: Meeting Your Fiduciary Responsibility.)

 

Disclaimer: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Highmark Wealth Highmark Wealth), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Highmark Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Highmark Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Highmark Wealth's current written disclosure statement discussing our advisory services and fees is available for review upon request. Please Note: Highmark Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Highmark Wealth's web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.