Over time, small changes can have a big impact — and not always in a good way. What would be the long-term health consequences of a daily doughnut or fast food lunch habit? Probably not anything you want. Likewise, years of excessive 401(k) fees can gradually erode the financial wellness of plan participants — definitely not the outcome they want.
The Employee Retirement Income Security Act of 1974 (ERISA) was intended to help protect plan participants from excessively high fees that can eat away at returns and compromise retirement readiness over time. According to the Department of Labor (DOL), a 401(k) valued at $25,000 averaging a 7 percent annual return and .5 percent in fees would grow to $227,000 over 35 years, even without additional contributions. However, if fees and expenses increase to 1.5 percent, it would grow to only $163,000 during that same period of time — decreasing the account balance at retirement by a whopping 28 percent.
Legal Landmines for Fiduciaries
Under the law, plan sponsors and fiduciaries are mandated to ensure that fees are reasonable. ERISA regulations are enforced by three governmental agencies: The DOL, the Treasury Department (primarily, the IRS) and the Pension Benefit Guarantee Corp. Accusations of breach of fiduciary duty due to excessive fees has led to a spate of 401(k) lawsuits in recent years — many resulting in hefty damages for plan sponsors and advisors.
What’s more, lawsuits once primarily targeted at large organizations have begun to impact smaller companies, putting organizations, 401(k) committees, finance executives and HR administrators in legal peril. The risks for companies are real and growing — and the risks for the financial health of participants of poorly managed and monitored plans is clear.
How Do You Like Them Apples?
Still, fiduciaries shouldn’t reflexively direct plan sponsors toward the least expensive investment and service providers. Higher fees can be justified if they’re commensurate with the value of the services provided based on an “apples-to-apples” comparison with similar plans — ones that are comparable in terms of relevant metrics including plan size, the number of participants and whether a bundled or unbundled fee structure is used.
Benchmarking plan fees — along with the documentation of other appropriate, prudent processes and compliance efforts — can help mitigate these legal risks, identify areas of fiduciary concern and help ensure that plan expenses, features, services and performance remain competitive. Nonetheless, the DOL’s lack of specific guidance on determining the reasonableness of fees, combined with the current legal climate, has created significant challenges for plan sponsors and fiduciaries.
While one way to conduct a comparative analysis of plan costs is through requests for proposals, this can be a cumbersome and time-consuming process. Benchmarking is often a much more convenient and efficient approach. The utility of a benchmark, however, is only as good as the data it’s derived from. Unfortunately, some popular tools rely on publicly available data that may not be accurate or fail to include certain factors such as TPA fees. When this occurs, you’re comparing apples to oranges, and the validity and usefulness of your benchmark is compromised.
A Better Way to Benchmark
PlanFees improves and streamlines the retirement fee benchmarking process. Our revolutionary fintech platform allows you to easily create accurate, professionally crafted benchmark reports on demand for advisors, institutions and their clients. As a PlanFees partner, you’ll have access to the only fee benchmarking application that bases its benchmark universe on tens of thousands of “live” pricing quotes. Advanced optical character recognition technology lets you instantly upload plan data for analysis from a photo of any fee disclosure document, so you can benchmark on-the-go, whenever and wherever you want.
Your reports are fully customizable for type and size of plan, number of participants, and bundled or unbundled fees. You can even input advisor and record-keeping fees as hard-dollar amounts or percentages — and get it all done in under two minutes. Benchmark quickly, easily, accurately and meaningfully with PlanFees.
We think you’ll love them apples.
