The (Often) Hidden Costs Behind Retirement Plans

 

The number one reason for DC plan sponsors to change their investment manager or recordkeeper is high fees.1 Unfortunately, it is very difficult for sponsors to accurately assess fees because they are typically confusing, hidden, and convoluted (often intentionally). This provides a great opportunity for Advisors to add additional value by guiding their plan sponsors through fee comparisons.

While fees have different names throughout the industry, there are standard services that will typically fall into one of three categories: (1) plan administration and recordkeeping, (2) fund expenses, and (3) ancillary transactional fees. This simple framework will help us compare fees and assist clients with making better decisions about plan vendors.2

1. Plan Administration Fees

There are a LOT of players when it comes to managing a 401(k) plan. As a result, they can account for a heifty portion of retirement plan fees. Here are some service provider fees to look for:

Non-Fiduciary

  • Recordkeeper The recordkeeper tracks basic plan information. They record who can participate in the plan, the flow of money, and the investments participants make.
  • Third Party Administrator (TPA) This service provider serves as a balance between the plan sponsor and the compliance guidelines set forth by the DOL and IRS. They do this by running compliance testing, produce the 5500, preparing plan documents and benefits statements, and tracking general activities carried out by participants.
  • Custodian The Custodian is the institution that holds the retirement assets.

Fiduciary

  • 3(38)/3(21) Investment Advisor  These services are for the investment fiduciary liability that a plan may outsource to or share with an advisor or service provider.
  • 3(16) Plan Administrator This is a fiduciary that helps execute the day to day tasks of plan administration, including distributing participant notices and disclosures and filling year end compliance documents. They have an added fiduciary responsibility to keep the plan compliant.
  • Advisor  This includes plan sponsor consulting, participant education and investment expertise.
  • Trustee This service provider directs movement of assets in a plan.

2. Fund Expenses

Fund Expenses are costs associated with the underlying investment products offered by a plan; there may be any combination of Mutual Funds, Exchange Traded Funds (ETFs), or Collective Investment Trusts (CITs) found in a retirement plan. Fund expenses may like the most obvious fees, yet funds can hide fees charged by other services providers to a plan sponsor and participants. Here are some common expenses you may find wrapped inside a tradition fund expense:

  • Trading Fees charged by fund management company to buy or sell an investment instrument.
  • Fund Management Fees charged to manage a fund; usually paid periodically as percentage of assets under management.
  • Fund Administration Cost for day-to-day administration of a fund.
  • Revenue Sharing A charge that may be included as a  portion of overall fund expenses, paid out to a service provider, typically disclosed as 12b-1, or Sub-TA fees
  • Guaranteed Income Products Similar to an annuity, guaranteed income products offer a minimum level of income for life.  However, these products can charge additional fees that are not required to be disclosed on the participant fee disclosure and early redemption fees if the participant exits the program early.

3. Ancillary Fees

These are one-time fees for individual transactions that a participant may or may not choose to carry out. Below are some common activities that may result in a  charge to the participant.

  • Loans These are fees related to taking a loan against the assets in a 401(k).  They are often substantial and may be ongoing for the maintenance of loan repayments.
  • Rollover Some plans may charge participants to move assets out of a previous 401(k) and into a new one.
  • Domestic Retirement Order (QDRO) A QDRO fee pertains to the allocation of assets in a retirement or pension following a divorce or legal separation.
  • Distribution A participant may request a distribution from certain plans due to termination of service or an applicable in-service provision in the plan document.

The complexity of retirement plans requires a lot of services – and they can add up. That’s why it is so important to help plan sponsors understand what they are paying for and why. Staying on top of fees helps keep participants from over paying and gives plan sponsors an extra level of trust with their trusted advisor.

 

1 Moore, Rebecca. “Investment Manager and Recordkeeper Changes Driven by Fees.”PLANSPONSOR, 26 July 2017, www.plansponsor.com/investment-manager-and-recordkeeper-changes-driven-by-fees/.

2 Does not include all possible fees; Fees listed may or may not be included based on individual plans.