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:
- You find out you are in a good place and file the report away in your 401(k) compliance file.
- You take the report to your current provider and possibly get some cost concessions.
- 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.)
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