When companies are selecting the services for their 401K plan, are they assessing the fees that they are paying for these services? As it has been required for these fees to be more transparent, this is something every company with a plan should be evaluating. The question becomes what is the best way to assess these fees? What is reasonable?
Who receives these fees?
The first question you should ask yourself is who are you paying for these fees? Common providers include record-keepers, investment advisors, plan fiduciaries, consultants and brokers.
While looking at the providers for your specific plan, you should review the fees and what services these fees are covering. This is something that the Company should be reviewing on a periodic basis. The Company’s review should be documented, including whether these fees have fluctuated and whether these fees in comparison of other service providers are reasonable. The Company should evaluate this at the plan’s cost as well as the individuals.
What are the fees that should be assessed?
The variety of types of expenses may make it difficult to evaluate what is reasonable. The best way to look at these expenses is to try to break them up into different categories. There are administrative services which typically include legal, accounting, customer service, recordkeeping, etc. This is normally charged at the participant level.
Then there are investment services which are paid to manage the employees’ investments. These can vary and are typically charged to the employee through a reduction of net return on investments. These tend to be the larger portion of the fees and vary more plan by plan depending on the mix of investments in any given plan.
Last, there are individual services. These include loans, loan maintenance charges, distributions, etc. At times these are charged to the individual participant or may be bundled.
Different methods to evaluate these expenses
There are many different methods that can be used to evaluate these expenses once you have an understanding of the fees within your plan.
- Use a professional service: There are a number of consultants that analyze the fees of different service providers. It is important to ensure that you understand the information that the consultants used during their analysis before making any decisions.
- Review third party information: Review other service provider’s fees. Be sure that when you are evaluating you take into consideration that the plans may vary in different ways. Therefore, when looking at these fees, take into consideration that the cheapest plan may not include services provided in another plan.
- Request proposals from opposing service providers: This may assist with a better understanding of the breakdown of these fees and can assist with comparison among other third parties.
- Benchmarking: There are different studies done that assist with understanding reasonable fees; however, when reviewing these make sure that you understand the metrics involved as each plan is not in-line with the others.
Understanding these fees is important to ensure that the neither the Plan nor the participant is paying unnecessary fees. However, it is important to balance reasonable fees with the services that are necessary for the Plan. Following these steps should help you gain an understanding of what to look for and some different ways to evaluate these fees.
By Brie C. Keckler, CPA