Why Plan Fiduciaries Need to Pay Careful Attention to Retirement Plan Fees
Competitive benchmarking is a way to measure and compare fees associated with running your retirement plan. Explore the most frequently asked questions about plan costs and benchmarking.
Retirement plan fees can take many forms, making it difficult to determine whether they're reasonable. In this article, we'll discuss why fiduciaries need to pay careful attention to fees and how benchmarking can help you make better, more informed decisions. We'll also explore some of the most frequently asked questions about effectively benchmarking retirement plan fees.
Why Is Understanding Your Plan Costs So Important?
For starters, it helps you fulfill your fiduciary duties and safeguard you, your plan and your committee from excessive fee lawsuits. Plan sponsors have a responsibility to understand plan fees under ERISA, the law that governs most workplace retirement plans.
ERISA requires plan fiduciaries to:
Monitor and benchmark service providers and other plan expenses to make sure that fees are reasonable based on the level and quality of services being delivered
Monitor and review the plan’s investment options regularly to make sure they’re performing in line with expectations
Disclose plan, investment and fee information to participants so they can make informed decisions on investing their savings
Fees typically fall into three categories:
Administrative: These are costs associated with the plan’s day-to-day operations, including recordkeeping, accounting, legal, trustee and other related expenses.
Investments: The largest share of plan expenses are investment costs that include investment management and investment-related services; they are often charged as a percentage of plan assets. It’s important to pay attention to investment fees because they aren’t always clear or easy to understand. Additionally, investment fees that are too high may significantly diminish participants’ returns over time.
Ad Hoc Charges: Generally, these fees are associated with optional plan features, like loans, distribution charges, etc. These costs are traditionally passed directly on to the participants who utilize them.
Fees are charged in different forms too, such as a flat fee, percentage of assets, or a combination of both. They may be charged on a one-time or on an ongoing basis, depending upon the services received.
As fiduciaries, plan sponsors must engage in a thorough process to ensure that plan fees are reasonable, and the benchmarking process is carefully documented.
What is the Best Way to Analyze 401(k) Plan Costs?
Benchmarking is the process of comparing costs and value for the services being received by your retirement plan with plans of a similar size and type. Issuing requests for proposal (RFPs) is a common approach to benchmarking, but it isn’t the only solution.
Other benchmarking resources include:
Retirement plan consultant databases
General benchmarking data
Recordkeeping data
How Often Should You Benchmark Your 401(k) Plan?
Generally, smaller plans may benchmark their fees and services every two to three years while larger plans may do an annual review. “Kicking the tires” on your plan expenses on a regular basis is a good way to determine whether or not the costs are in line with plans with similar assets and service needs.
Need Help Understanding Your 401(k) Plan Fees?
Making sense of your plan fees and recognizing whether or not you’re getting the most value for them can be complex. We can help you review and evaluate your plan costs so you can make informed decisions on how to manage them effectively. Understanding your plan fees is critical when it comes to carrying out your fiduciary responsibilities, as well as simply feeling more confident that you’re doing what’s best for your employees.
To learn more about the reasonability of your plan’s fees, as well as its investment and governance quality, contact us today for a complimentary Retirement Plan Diagnostic™.