Whether you’re in the market for a new car, booking a hotel or benchmarking a retirement plan, price comparisons can be tricky business. Resort fees, dealer fees, convenience fees and more — it seems nearly every industry has a variety of clever pricing methods that can obscure relative value. As a consumer, this means you might occasionally pay a higher price for that oceanfront suite or new minivan. But as a fiduciary, failure to ensure that the fees plan sponsors and participants pay for their 401(k)s are reasonable can lead to costly lawsuits and hefty penalties.
Types of Fees
Retirement plan fees can be generated from participant accounts and plan sponsors (both are direct fees), and from the investment funds themselves (indirect fees). Direct fees, paid by plan sponsors or deducted from participant accounts, are clearly reported in provider invoices, ERISA 408(b)(2) and 404(a)(5) fee disclosures and plan statements. Indirect fees — sometimes called hidden expenses — in the form of wrap fees and revenue sharing can be estimated in 408(b)(2) disclosures, concealed within the investment expense ratios of 404(a)(5) disclosures and not revealed in plan statements. Plan fees can be charged up front or levied for optional services. Upfront fees are calculated in a variety of ways.
Basis Point. In this instance, fees are calculated as an expense ratio, expressed as a percentage of net assets. Take an example of two plans with the same design and number of participants but one with significantly greater assets under management. Using this model, the larger plan paying fewer basis points could be significantly overpaying relative to a smaller plan paying many more basis points — once fees are tallied on a per-participant basis.
Per Participant Charge. Flat rate fees are charged for each participant enrolled in the plan. For the reasons mentioned above, this can be a more advantageous approach than a basis point fee structure, especially for larger plans. If fees are not benchmarked against plans with similar numbers of participants following periods of high growth, a plan can easily find itself overpaying for services on a per-participant basis. The trend has been toward this more transparent model with the recent groundswell of 401(k) lawsuits.
Revenue Share. This is the most common form of indirect fees, paid by mutual fund companies to providers based on a percentage of plan assets in the form of 12b-1 fees. This can create a much more opaque fee structure and therefore is becoming less widely adopted. And it can limit investment choices by excluding many popular index funds and ETFs that don’t offer this option. While this model can often afford an organization lower fees, it often comes at the expense of investment menu flexibility and fee transparency.
Bundled vs. Unbundled Fee Structures. In a bundled model, one vendor acts as the TPA, record-keeper and custodian, furnishing plan documents and preparing the Form 5500, acting as a “one-stop shop” for these services. However, there’s usually no access to mutual funds that aren’t managed by the vendor.
Alternatively, plan sponsors can contract some or all of these services individually by contracting with a TPA in an unbundled service arrangement. In this case, fees are generally more transparent as they’re charged and disclosed separately. While it’s often assumed that a bundled model offers greater fee efficiency, this isn’t always the case. Plus, an unbundled model provides greater flexibility to select the individual service providers best suited to the needs of the plan sponsor and participants. For these and other reasons, many plans are unbundling their services.
Benchmarking Made Simple
Regular benchmarking of retirement plan fees can help advisors and plan sponsors ensure that all fees are reasonable and commensurate with services provided. But a benchmark is only as good as the data it’s derived from. PlanFees delivers unparalleled accuracy by relying exclusively on data from live bids and live data feeds from the top record-keepers, TPAs and 401(k) fintech platforms. And you can easily customize your comparison benchmark by adjusting the ranges of plan assets and participants — and whether fees are bundled or unbundled — to provide a more meaningful and revealing comparison for your client.
Our seamless and efficient fee benchmarking experience uses advanced optical character recognition technology that allows you to quickly scan fee disclosure documents to create professionally crafted reports on-demand, wherever you happen to be — in under two minutes. By showing investment, record-keeping, administration and advisory fees in a concise, easy to digest format, we’ve brought transparency, scalability and clarity to the complex world of retirement plan fees.
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