Understanding retirement fees is now a fiduciary responsibility. Federal rules require that plan vendors disclose their fee formulas. So that you can evaluate whether your current arrangements are reasonable and competitive.
High fees can erode your investment performance and force you to work longer before retiring. The key is understanding the types of fees you are paying and their allocation methodologies.
Participant Fees
The retirement industry is host to various fees that can be difficult for plan sponsors and participants to understand. This confusion is compounded by the convoluted way providers are paid for their services. However new rules require plan vendors to be more transparent about fees and revenue.
One of the most important things to remember is that the investment expenses you pay can significantly reduce your total investment return and, ultimately, the amount of money you have available in retirement. So, it is important to compare fees among different funds and to understand how they affect your overall returns.
Many retirement plan fees are charged at a flat rate or in proportion to the average account balance of your investment options. However, others are charged based on the size of the assets in your account and can significantly reduce your return. That is because it takes much more work to track the investments in a large plan than in a small one. Which drives up the cost per participant.
The good news is that your plan provider, like ADP Retirement, is now required by recent amendments to fee disclosure regulations to give you a comparative chart detailing each investment option’s fees and performance. Using this chart can help you make more informed decisions about the investment options in your retirement plan.
Another essential thing to remember is that it’s your fiduciary responsibility to ensure. That the fees you and your employees pay are reasonable for the service received. So, if you see an excessive fee structure, bring it up with your provider.
Investment Fees
Investing fees have been in the news lately as regulatory agencies update rules and provide new fee disclosures. The result is that many more 401(k) plan participants will receive comparative fee information for each of the investment options offered by their providers.
The problem is that the range of fees charged to retirement plan investors needs to be clarified. There are record-keeping fees, investment management fees, advisory fees, 12b-1 fees, and more. And there are also revenue-sharing fees, which can be hidden from the investor. These fees can significantly reduce an investment’s net total return when added together.
In a survey, nearly 7 in 10 workers with retirement plans said they were familiar with the fees charged to manage their funds. However, 31 percent were unfamiliar with their costs, and a third had not read any investment fee disclosures in the past year.
Research suggests that those less familiar with their plan fees tend to have lower confidence in making the right investment choices. And not surprisingly, they also need help saving enough to reach their retirement goals. In addition, this research hints at an exciting relationship between workers’ familiarity with their fees and their willingness to accept investment risk.
Administration Fees
The fees that plan providers charge to manage the back-office functions of your 401(k) are called administrative fees. They cover things like record-keeping, accounting, and legal services. They also contribute to day-to-day operations like customer service representatives and educational seminars. Administration fees can be direct or indirect. Immediate fees are disclosed and deducted from participants’ accounts. Indirect fees increase the cost of your 401(k) investments, lowering their returns. These fees are buried in expense ratios and often need more participant transparency.
These costs are assessed either flat or on a sliding fee structure as asset levels increase, and the size of assets usually determines them in the retirement plan. Some plan sponsors may even charge a per-participant fee to cover costs for the retirement plan itself rather than individual investment accounts.
Over 0.10% for the plan administration charge (enough to cover asset custody) is excessive and may result in overpayment of services by you and your members.
These fees are charged for liquid or hard-to-trade assets in your retirement plan that require manual records and valuations. Some vendors charge these fees, ranging from a flat fee to a percentage of total asset value. Federal law requires that retirement plan vendors disclose the amount and fee formula for these fees. So you can make an informed decision about whether or not these are reasonable and competitive. It is an excellent place to start your investigation. The fee information is in your plan’s prospectus and quarterly statements. In addition, your 401(k) provider should be able to provide you with this information upon request.
Custody Fees
Custody fees are expenses incurred by financial institutions or brokerage firms that hold investment assets, like retirement accounts and taxable accounts. These costs cover the cost of safekeeping the investments, maintaining accurate records of their holdings, and executing transactions on behalf of investors. Custodial fees vary by firm and account type and are often regularly deducted from the account balance. They can also be negotiated.
The cost of custody fees is a significant expense for investors. And it is essential to understand the impact these fees can have on long-term investment returns. Financial advisers are crucial in guiding clients through fee structures, representing them in negotiations, and suggesting cost-cutting measures that achieve investor objectives.
401(k) custodial fees are typically split between direct and indirect fees and can be found on your participant fee disclosure statement. Immediate payments are explicit in their dollar amount. While indirect costs are included in the total fund expense ratio and can be more challenging to discern.
In addition to traditional 401(k) administration fees, custodial fees can be incurred for services such as preparing annual nondiscrimination testing and Form 5500s (third-party administrative), distributing distributions, holding assets, and executing trades on behalf of participants. Custodial fees can also vary by asset size, with larger accounts incurring lower custodial fees on a percentage basis due to economies of scale and reduced transactional costs.
Investors need to be able to weigh the cost of custody fees against the quality of service and investment options provided. Fees should be minimized without sacrificing access to valuable services or investment opportunities.
Fiduciary Fees
Retirement plan costs can be complicated between administrative, investment management, and custody fees. Fees can be paid directly or deducted from participants’ accounts (plan assets). Fees may be taken from participants’ accounts (plan assets) or paid directly. For instance, the recordkeeper may be associated with the bundled provider or independent through an unbundled arrangement with a third-party administrator (TPA). The same goes for the consultant, which is the plan sponsor. The participants, or through a revenue sharing and sub-TA arrangement can pay.
It is essential to understand the fees charged to objectively assess whether the costs are reasonable for the service provided. A clear understanding of the fee structure is critical to determining if your retirement plan meets its fiduciary responsibility to protect participant’s interests by offering prudent investment options at reasonable costs.
ERISA requires fiduciaries to ensure a plan’s total cost of fees is reasonable. It means that the fees must be proportional to the amount of services provided. With retirement fees serving as the centerpiece for many fiduciary breach lawsuits. It is crucial to understand how the fee structure works and what it should look like. For this reason, it is essential to consider a fiduciary fee analysis as part of your 401(k) due diligence process. To learn more, download our white paper on fiduciary fees.