Owning a business is often terrifying, gratifying, challenging, rewarding, and everything in between. You pursued entrepreneurship because you had a passion, vision, or mission and knew you could provide or service it better than others. What you didn’t get into business to do is understand the ever-changing and complicated nature of actually running the business.
Everything from administering payroll, to selecting benefits, completing paperwork, and establishing a 401k retirement plan for yourself and/or your employees. Kudos to you for taking the leap to finally get the plan in place but now you have picked up a role that you may not have realized you did; plan sponsor. Did you know that as a plan sponsor, you’re considered a fiduciary of the plan (meaning you must act in the best interest of your employees)? Employees can legally sue you for not ensuring you’re fulfilling your fiduciary duty. Queue every business owner saying: “I didn’t sign up for this!”
While there are certainly many other factors to consider as a plan fiduciary (stay tuned for future posts), one of the most important is plan fees. Today’s post is intended to provide a high-level introduction to the categories of fees that typically exist with sponsoring a retirement plan for yourself and/or employees.
1) Investment Fees
These are often the costliest expense to a plan and are any costs associated with the management of the plan’s assets. They are generally a percentage of assets and are taken from returns on the funds of the plan. This will impact the amount/returns your participants receive since this fee comes out before participants even see or reap the returns. It’s not a direct cost and isn’t a line item on statements so it’s difficult to immediately know or understand what that cost is and the impact it’s having on your plan.
Within the category of “investment fees” there are typically two types: a managed account fee (for the ongoing management of the specific investments) or a sales charge which is a commission for the buying or selling of certain funds. I won’t review the types of sales charges but there are multiple types to be aware of; some applied on the front end and some applied on the back end of the sale. Additionally, there are specific costs and expenses associated with mutual funds and other investment products though they are outside of the scope of this basic overview of the categories of fees.
2. Administration Fees
These fees pay for the cost of the basic operation of the plan and could include the daily transactions that happen within the plan as well. It pays for the recordkeeper/provider to be able to support the functionality of the platform of funds, processing of transactional requests such as withdrawals or contributions, as well as the employees who have to interface with you or your participants.
Something to note is that this fee could cover administration and recordkeeping (bundled) and show up as one fee or it could be broken out if you are in an unbundled model. Different providers and administrators charge in different ways; some charge a percentage of assets or a “per participant” charge and some simply charge a flat fee regardless of plan size.
3. Other Service/Feature Fees
These fees are customized and specific to your plan based on the features you prefer and what the provider and administrator have available. For example, there could be additional costs for the printing and mailing of statements or for the transactional processing of a loan request for a participant. Many administrators now have tiered pricing with different levels of service or have a “pick and choose” type of service model where you can choose certain features and pay a slightly higher fee for each one they add. As a plan sponsor, make sure you understand the objectives of your plan and decide based on those objectives, the needs of your plan and plan participants. This will help you determine how much to spend and what everyone’s best interest.
Finally, I want to end with a comment about what a “reasonable” cost for service is and how to measure that. Unfortunately, it’s not a black and white subject and is dependent on what each individual plan needs. What is extremely important is that cost alone isn’t the deciding factor ever. If your goals and objectives align with the lowest fee, bare bones type of service then it’s appropriate to pay the lowest fee but you ALWAYS start with the objective. Of course, as with anything in life, generally when you pay a low cost or discount on services, you get what you pay for. There is good reason that some providers and administrators charge more and likely it’s because they have better quality, more customized services, or personal points of contact to help you through all your plan needs.
Plan fees and expenses are one of the most important aspects of a plan to consider and cheaper isn’t always better but what’s absolutely necessary is finding the level of services needed for your plan and participants to thrive.
Glossary of Terms
Recordkeeper/Provider: this is the custodian or platform you use for the 401k plan. Not sure what company this might be? What website do you log into to view your account? That’s almost always the recordkeeper/provider.
Third Party Administrator: this is the company that handles the administrative needs to ensure your plan stays qualified. Bottom line: qualified = all those tax benefits and deductions you get!
Adviser/Broker/Registered Representative: this is the person responsible for managing your plan or “selling” you your plan. He or she should be offering employee education, on-call service for any needs you may have, and helping you decide the best features and funds for your plan.
Bundled: bundled simply means that your Third-Party Administrator (TPA) is the same as your recordkeeper/provider.
Unbundled: unbundled is the opposite of bundled; meaning that your TPA and recordkeeper/provider are separate.