401k Plan Fees; What is reasonable?
All 401K plans have fees that are charged. As the sponsor of a 401K plan, you are legally obligated to be aware of the fees that you are paying. You are also legally obligated to review those fees and ensure they are reasonable compared to your plans peer group.
What type of fees does a 401k plan have?
There can be many different classifications of fees within a 401k plan. But all of them can be broken down into 4 main categories:
Mutual fund expenses
Record keeping fees
Fees for Ancillary features/programs
The first three will usually apply to all plans. Not all plans have ancillary features or programs. These would include Financial Wellness programs or enhanced Asset Management programs. These programs are almost always optional so they will not apply to all participants within the plan.
These 3 expenses combined make up the total expense charge for the plan.
What range should my total expenses be in?
Total plan expenses depend on a variety of factors, but mainly on the amount of Assets in the plan and the amount of participants in the plan.
The larger the assets are in the plan, the more you can Leverage that large pool of money to reduce the expenses. The fund expenses will see the greatest reduction as the asset size grows larger.
But the more employees that participate in the plan, the higher the record-keeping and administrative expenses can get.
Generally speaking, the larger the plan is, the lower the total expense ratio should be.
According to the most recent statistics, here are some industry averages for various-sized plans:
A breakdown of the 3 categories of expenses
This is fairly self-explanatory. As you probably guessed already, these are the expenses charged within the chosen mutual fund. Generally speaking, the majority of this expense goes to the people managing that fund. For plans under 5 million dollars, sometimes a very small portion of the fund expense goes to the Record Keeper of the plan.
The Record Keeper is the company that provides the investment platform and the funds within the plan. They keep track of the funds performance and provide customer service for the plan participants.
Record Keepers charge their expenses in various ways. The main difference is usually between small plans and large plans. For small plans, usually they charge a percentage of the total assets. Often they receive a small portion of the fund expenses as well. Sometimes you will see plans that pay the Record Keeper enough out of the fund expenses so that they waive any other hard charges. Obviously it obscures things a bit when they are able to be compensated by various means. This is why you always have to look at the total expenses charged instead of just that one specific type of expense.
Large plants benefit from their size. Often they are able to negotiate a flat fee with the Record Keeper along with paper participant charge. This usually works out to a much lower dollar figure for a large plan vs a percentage based fee. However, some companies are starting to offer flat fee options for plans as low as 2 million.
The administrator of the plan tracks the payroll and contributions to the plan. They also do any required yearly testing or DOL filings for the plan. Sometimes the administrator is the same as The Record Keeper. This is referred to with in the industry as a bundled 401K plan. If Administration is handled by someone other than the Record Keeper, this is called an unbundled plan. And the administrator is called a TPA.
For a bundled plan, the administrative fee is bundled with the record-keeping fee.
For an unbundled plan, the TPA fees are almost always charged is a flat fee and usually billed directly to the business. Never agree to have TPA fees charged as a percentage of assets. That is not a reasonable way for a TPA to be compensated.
There is a lot of debate within the industry on the merits of an unbundled plan versus a bundled plan. The truth of the matter is that it all depends on the situation and the needs of the business. For a very small plan sometimes a bundled solution makes sense and is the most cost-efficient option. Other times it does not. Large plans usually use a TPA but not always. There is never one single correct way to set it up. However, I am a fan of using unbundled plans in most situations. Expenses aside, it allows the business more flexibility to make changes to service providers in the future.
Fees within a 401k plan can be complicated. Your plan advisor should review the fees with you on a yearly basis. They should also Benchmark the fees for you at least every 3 years minimum. If you have not reviewed the fees in your 401k plan recently you need to. Not only is it your legal obligation as a plan sponsor. But it is also your own personal hard earned money. By no means are you required 2 or should go with the absolute lowest cost plan on the market. Often something of quality is not the lowest cost option. But it is not rare to find $3000000 plans that are paying double what they should be. Only because they have not used their asset size to negotiate a lower expense. Obviously that is something your plan advisor should be proactive about for you. But as a plan sponsor ultimately this responsibility falls on you and if it is not happening on a regular basis it is up to you to change that.