Why Should I Benchmark 401(k) Fees?

Why Should I Benchmark 401(k) Plan Fees? 

If your car needs gas, you can get a good idea of fair prices by comparing prices as you pass gas stations. But, unfortunately, it can be tough to know how your 401(k) fees and services compare to other similar-sized plans. If you're involved in your company's 401(k) management and want to know if you're overpaying for the services you're getting for the 401(k). How do you do that; you benchmark.

The Department of Labor has clearly outlined fiduciary responsibilities around understanding plan fees.

"Understanding and evaluating plan fees and expenses associated with plan investments, investment options, and services are an important part of a fiduciary's responsibility. This responsibility is ongoing." (Labor, 2021)

Several providers are involved in a 401(k), and just because you don't write out a check for the services doesn't mean the provider works for free. Many costs come from participant assets. Every dollar spent on plan expenses is a dollar that could have earned interest in participant accounts.

What Types of Fees are in a 401(k) Plan?

Common 401(k) fee categories include:

• Plan administration fees: These are fees associated with the day-to-day operations of your 401(k). 

• Investment fees

• Sales Charge These are fees and commissions built into funds. 

• Investment Management Fees: These fees are often a percentage of assets.

• Mutual Fund Fees

• Front-end load: sales charge when you buy the fund

• Back-end load: Deferred sales charges and redemption fees can fall in this category. These are sales charges when you sell a fund: 

• 12b-1 fees: These are ongoing fees often used to pay commissions to brokers and salespeople. 

• Collective Investment Trust (CIT) Fees

• Individual Service Fees

• These are often fees for optional services. For example, fees related to loans could fall under this category.  

Looking Beyond Fees

Fees are necessary to look at, but they don't provide a complete picture. When buying a car, the cheapest isn't always the best option. Buying a clunker that doesn't start is not a prudent option, even if it's the lowest-cost option. 

It's essential to ensure fees are justified, and if you are overpaying, go back to your service providers and request new quotes. Or get an RFP and see if there are better options. Make sure there is a process behind your fee management and that you document processes and decisions in your fiduciary file.

Bibliography

Labor, T. D. (2021, September). Understanding   Retirement. Retrieved from dol.gov:   https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/understanding-retirement-plan-fees-and-expenses.pdf