Thin(k) About Your 401(k): Plan Plan Fees: The Three Rs – They Are Real And Must Be Reviewed And Deemed Reasonable
I know something’s wrong when a business owner / plan sponsor tells me that they don’t pay any fees for their 401(k) plan. I can’t think of a case where this could be true. The plan sponsor might not be writing a check for services, but there’s no doubt a plan provider is collecting a fee. Plus, plan sponsors have a fiduciary obligation to regularly review, understand and judge those fees to be reasonable, and document the review process. So, if a plan sponsor thinks there are no fees? That could be a problem.
How do service providers collect fees? There are various ways and many of these can be confusing for plan sponsors. Providers are often paid directly out of the employee’s accounts in the form of asset-based or per-account fees.
Record-keepers usually charge a fee in the form of an asset but could charge a flat fee per year. Either way, that fee is most likely deducted from the participant’s account.
Third Party Administrator fees are sometimes bundled with the record-keeper’s fees but could also be billed directly in which case the plan sponsor would write a check.
Investment management fees charged by the investment funds or ETFs offered in the plan lineup are asset based and taken directly from the assets of the fund. Sometimes, the investment management fee, the record-keeper/TPA fee and other fees are reported as one number appearing to be the cost of the investment choice.
Here’s the good news: plan fees are generally disclosed in an annual disclosure document by the record-keeper. The plan sponsor must review this disclosure, understand what each service provider is being paid, deem the fees reasonable and document the review. Yes, this is the plan sponsor’s fiduciary duty, but investment advisors can assist and help plan sponsors understand where fees are coming from and how they’re collected.
The bottom line is that no one I know in the financial services world works for free. Some plan fees are reasonable, but upon review, others are not. Because fees are deducted from the participant’s account, they effectively reduce the growth of the account. That means it’s critical to ensure fees are reasonable for the success of the plan.
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