There’s no denying that fees are a hot button topic surrounding just about anything – and 401(k) plans are no different. It wasn’t until late 2012 that there was any regulation requiring the disclosure of fees to employees and plan sponsors, and even then 401(k) providers did a great job providing minimal information to prevent any unwanted phone calls.
The main confusion about fees is the difference between hard and soft dollar fees. Most 401(k) fees aren’t paid with a physical check; instead they are calculated based on your assets, and in most cases, paid out of returns. This makes it difficult for many individuals to truly understand how much they actually pay. The fees that participants usually pay in a retirement account are under one percent, although this number doesn’t include the expense of mutual fund management.
You can see how it’s easy to get confused when determining your actual 401(k) costs. Then, to throw another curveball into the mix, most mutual funds bundle all costs into the fund’s expense ratio. As a plan sponsor, the best way to get the fee conversation started is to request your plan’s current required revenue from your provider. Once you have the required revenue, you should ask if it includes recordkeeping, administration, and advisory. Once you have this data, the next step is requesting a breakdown of the revenue being generated from the mutual funds.
With most insurance-based providers (i.e. John Hancock, Lincoln, MassMutual, etc.) it is a good idea to analyze the yield of the stable value in the plan versus the actual yield the fund pays out. Many times, these numbers will vary because the fees are being hidden and paid out from that fund, which means that your employees who are holding money in cash are not only getting the lowest return but are also paying the highest fees. To add fuel to that fire, stable value funds aren’t required to disclose expenses because they are regulated by insurance companies.
That is why it is very important to have an advisor on your plan who acts in a fiduciary capacity – otherwise the responsibility and liability to manage all these variables will fall onto the shoulders of the plan sponsor and trustees.
At Key Client Fiduciary Advisors, when a company hires us as their plan consultant, one of the first things we do is provide a breakdown of each cost and expense paid for by the plan. This gives us the ability to negotiate the price and expense each provider is charging in order to lower the costs each participant is paying, which, in turn, will also reduce the fiduciary liability associated with providing an expensive plan to your employees. Schedule a consultation with one of our 401k specialists to learn more about admin fees.
Key Client Fiduciary Advisors, LLC (“KCFA”) is an SEC-registered investment adviser located in Fairfield, New Jersey. This blog post is limited to the dissemination of general information pertaining to KCFA’s investment advisory services. The information in this blog post should not be construed as personalized individual advice. A copy of our KCFA’s written disclosure statement as set forth on Form ADV, discussing KCFA’s business operations, services and fees is available upon written request.