Summer is not only time for cookouts and beach days, but as business owners and leaders, it’s also time for retirement plan reviews. These review conversations should include discussions of fees – something that may seem easy to brush off as standard and mostly static, but in fact, closely examining the fees makes a difference for your legal protection and your employees’ futures.
Fees may be more complex than a simple line-item in your corporate budget; if you type 401(k) lawsuits into a Google search, you can read countless stories of ligation brought by either excessive fees or inappropriate investment options.
Business owners who sponsor plans must manage their fiduciary responsibilities, including administrative support, selecting and monitoring service providers, plan design and management and participant communication. In the context of ERISA, the Employee Retirement Income Security Act, a federal law protecting individuals, plan fiduciaries must act in the best interest of plan participants and beneficiaries. This includes creating a culture of monitoring the plan fees on a regular basis to ensure that they are reasonable for what the plan is receiving.
Fee benchmarking is an important piece of the 401(k) governance process. Each year, the U.S. Department of Labor requires every 401(k) plan to distribute an annual fee notice to plan participants. Fees can come in all forms such as the fund investment fees, investment advisory fees, and the cost to run the plan such as compliance or and custodial/recordkeeping fees. Unfortunately, 401(k) plans have ongoing costs, and there are many ways for those costs to take shape.
The most common method of charging for 401(k) plans is either direct or indirect fees for the plan participants. Direct fees to the participants, such as custodial/recordkeeping fees, administrative fees, and investment advisory fees, are typically paid via plan assets and are very transparent since they will be listed on fee disclosures and participant’s statements as a line item.
Mutual fund companies also withhold their fund fees or expense ratio from the performance of the fund, which would be indirect, as plan participants do not see them deducted on their statements. Some of these expense ratios are higher cost. These higher ratios provide a revenue share to offset the plan cost. Years ago, indirect fees were the most common in 401(k) plans, but over the last ten years the industry has shifted to the more transparent direct fee model.
There are many types of advisers providing business retirement plan services. Finding one that aligns with your company culture and your leadership style is key. Your adviser should act as the go-to for you and your employees/participants to help prepare you for retirement. Since business functionality and operations may look different now due to the pandemic, an adviser who focuses on employee engagement, employee enrollment, plan design, and virtual communications are part of the new normal. An adviser’s compensation should be tied to the value-added services they provide to the plan sponsor and participants. Trusted advisers walk hand-in-hand with plan sponsors to provide a tremendous benefit for their participants as well as making sure fees are monitored on an ongoing basis and benchmarked regularly.
Reviews and Changes
During an annual plan review, business owners and leaders should review their total fees with their advisor to make sure that plan fees are fairly aligned to the marketplace. If you are not sure if your fees are reasonable, the best practice is to benchmark your plan every three years.
The records-keeping industry has been very competitive over the last 10 years with much consolidation. When benchmarking your plan, have your advisor go to a few different service providers and provide a proposal for service to complete thorough due diligence. These proposals should include who will be the custodian for the assets, the types of investments available on their platform, and the participant education options available. Many record keepers are providing greater resources through technological advances at a much lower cost than even just a few years ago. The industry has also changed by moving from actively managed funds to passively managed funds, delivering lower overall plan costs. A quality advisor can gather the information and provide insights and analysis into what option may be the best fit for your company, comparing price, customer service, technology, and communication.
Examining your detailed fee structure as well as the investment options available to your participants can be important for your liability as a business owner. Knowing the changing trends in the 401(k) plan industry, how you can adjust to those trends to support your team, and ensure you have a retirement plan that works for you and your staff can help your company remain strong.
Steven P. Maher, CPFA, is a partner and senior wealth adviser at Domani Wealth.