When you sponsor a retirement plan, you take on the legal responsibility as a fiduciary. Being a fiduciary carries with it a number of duties as outlined in the Employee Retirement Income Security Act (ERISA). One of your main responsibilities is to ensure that all services provided to your retirement plan are necessary and the cost of those services is reasonable.
Unfortunately, this is easier said than done. There is a myriad of costs and fees associated with retirement plans, and they aren’t always clearly stated. In order to fulfill your fiduciary duty of monitoring retirement plan fees, it is important to understand the different kinds of fees and how they are paid. Retirement plan fees usually fall into one of the following three categories:
Plan Administration Fees
There is a lot of work and time that goes into administering a retirement plan. Recordkeeping, legal support, accounting, trustee services, and many other activities are all necessary to the everyday operations of a plan. All of these things cost money. None of them are free.
Profit sharing and 401(k) plans may have even more services that generate fees than any other type of retirement plan. Access to a customer service representative, telephone voice response systems, educational seminars, electronic access to plan information, retirement planning software, online transactions, daily valuation, and investment advice are all additional services that you may want to include for your plan participants. Administration fees usually rise in proportion to the number of services provided.
Administration fees can be paid in various ways. At times, they are deducted directly from investment accounts along with the investment fees. Other times, they can be billed separately with either the employer paying them or passing them on to the plan participants. When the expenses are passed on, either a flat fee is charged for all participants or an amount that is in proportion to their account balance is assigned so that those with higher balances pay more.
Individual Service Fees
Retirement plans with individual accounts, such as 401(k) plans, will sometimes have individual service fees associated with optional services. Loans against the plan or personally directed investments are examples of these optional services. Since these fees are only incurred by specific plan participants, they are charged directly to their accounts and not pooled.
The cost of managing plan investments is where the bulk of retirement plan fees originate. Most often, these investment fees are paid as a percentage of invested assets.
Investment fees are the least obvious fee but can be the largest expense so it is very important to have a firm understanding of them. They do not usually show up clearly on statements like directed charges do because they are deducted directly from investment returns. In addition to being vague, they have a great impact on net returns because they are taken directly from the investment accounts.
It is important to recognize and evaluate investment fees. You might want to work with a pension specialist because it can be difficult to find the correct information as well as being aware of how it impacts your plan participants. You need to make sure you understand these two kinds of investment fees:
These are the transaction costs for buying and selling shares and funds. Since different investment products compute these fees in different ways, you may want a consultant to help you decipher them.
Management Fees/Investment Advisory Fees/Account Maintenance Fees
These are the ongoing charges for managing the assets of the investment fund. They are usually charged as a percentage of assets invested and can include administrative fees as well. It is important to understand what this fee covers and whether or not it is reasonable for your plan.
There is a wide variance in management fee levels. The more management, research, and monitoring that is required, the higher the fees will be. But be careful! Higher fees are not always indicative of better performance. That is a dangerous assumption to make.
Evaluating fees is a very important part of your fiduciary duties and should not be taken lightly. If you don’t feel you have the expertise or time to do so, you should delegate the task to a competent pension consultant. At Beacon Pointe Advisors, we have a team of experienced specialists that can help you understand the fees you are paying and how they compare to the other options available to you in the market today. Give our office a call at (949) 718-1600 or email us at firstname.lastname@example.org
Disclaimer: This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation.