To better manage fees, it’s necessary for plan sponsors to have a clear understanding of the costs a plan incurs. The DoL has identified three types of fees associated with 401(k) plans: the administration fee, the investment fee, and the individual service fee.
The administration fee includes recordkeeping, accounting, and legal and trustee services. The investment fee includes plan asset management, sales charges, commissions, an investment advisory fee, and mutual fund management services. Individual fees are charged directly to the plan participant’s account for special plan features like loan origination and loan maintenance fees. While that may sound like a lot to evaluate, 90 percent of respondents to Deloitte’s survey believe they have a clear understanding of the total fees being charged, and 84 percent think their fees are competitive.
Deloitte’s Jackson emphasizes the importance of assessing the totality of the fees that are charged by vendors. “Plan sponsors should look for total plan fees to be less than 1 percent of total plan assets,” she says. Fees should be assessed annually to ensure that they are competitive and reflect the level of services being offered.
Jackson says that often the most visible fees are the direct charges, such as the per-participant account fee, or transaction-based fees, such as the fee participants pay if they take out a loan. While direct fees are easy to monitor and compare with the marketplace, she says, plan sponsors often overlook indirect fees, which are investment management fees. “They are typically netted out of returns of investment funds or out of the asset values on mutual funds, and often fall under the venue of investment monitoring,” says Jackson. Increasingly, she adds, investment fees are becoming a significant part of the charges accrued for servicing 401(k) plans. Indeed, notes HR Investment Consultants, in Baltimore, for most mature plans, investment management fees represent more than 85 percent of total plan costs.
According to the Deloitte study, 70.4 percent of the sponsors responding pay the bulk of fees related to recordkeeping and administration. As far as investment management fees are concerned, 54 percent of plan sponsors indicated that they pass investment management fees on to plan participants by deducting them from their investment returns; 3.8 percent charge employees directly for investment management; and 42.2 percent of sponsors pick up investment management fees.
Recordkeeping, which includes processing distributions and fund transfers, allocating contributions and earnings to participants’ accounts, and enrolling new participants, among other things, is one of the most critical but often overlooked functions of a 401(k) plan. “Often, plan sponsors choose a vendor without due diligence, without making sure that a particular vendor is capable of handling a particular plan. Plans differ in terms of complexities,” says Esch. “For example, companies that offer their own company stock have different issues, from an administrative point of view, than companies that don’t.”
Wray of the Profit Sharing/401(k) Council of America puts it more strongly. “If you drop the ball on the recordkeeping, you’re gone,” he says. “The key to this whole system is that there’s an expectation that you have accurate, timely, quarterly statements.”