How to Evaluate Your Retirement Plan’s Fee Structure
With all the commotion in the retirement plan industry around the fiduciary rule, a lot of recent attention has been paid to retirement plan fees. Though we think this rule will ultimately improve a plan sponsor’s ability to evaluate fees, there can still be challenges in establishing what exactly you should be paying for a plan, or how those fees translate into the overall costs associated with a plan. While looking for solutions with low prices may reduce short-term costs, plan sponsors may ultimately sacrifice plan services that can be beneficial in the long run. With so many choices in plan design, and with outcomes being sometimes difficult to measure, how do you review the costs associated with a plan?
Under the Employee Retirement Income Security Act (ERISA), plan sponsors are fiduciaries to their participants – they are legally obligated to prudently select services and investments that are in the best interest of plan participants. Thus, plan sponsors evaluating their current plan, or considering changes to it, should review components such as the transparency of fees, the reasonableness of plan costs, and how fees are allocated to, and generate value for, their participants.
Here are a few things that plan sponsors should consider when reviewing 401(k) plan costs.
Between a plan’s administrative costs (recordkeeping, administration, and compliance testing), investment costs (expense ratios), advisory and consulting charges, and individual service fees, there are many variables for plan sponsors to keep track of. Yet in evaluating the efficacy of a plan’s cost, one fundamental question stands out: Is there transparency in the cost structure?
For example, if a plan charges “zero” administrative fees, check to see if the service provider is compensating their required income through other hidden charges, like revenue sharing. This is also a good example of the difference between “fees” and “costs”, and how even though a feature can have a low fee, its structure can incur other “costs”, still affecting a plan’s bottom line.
Ultimately, you want service providers that present costs of any kind up front. If a plan’s true cost has to be uncovered through tedious investigation, it may not be designed in a way to add value to the participant’s retirement readiness.
The “Reasonableness” of Fees
How do you know if the fees in your plan are reasonable? A thorough “benchmarking” process, or assessment of your plan compared to those of others with similar features, will help to put your fees in perspective. While ERISA mandates that all plan decisions must be made “with the exclusive purpose of providing benefits to plan participants and their beneficiaries” and “defraying reasonable expenses,” the exact nature of a fee’s reasonableness is not clearly defined.
If reasonableness is relative, it is up to a plan sponsor to determine what features they want included in their plan. A few questions that may guide your assessment of your own fees:
- Am I happy with the services included in my plan that add in extra fees?
- For any investment options with relatively high fees, is there a benefit to participants in including these options?
- What benefits do my employees reap from the features I am being charged for?
Getting the answers to these questions will help a plan sponsor begin to determine the reasonableness of a plan’s cost structure.
Overall Value to Employees
The reasonableness of a plan’s fee structure comes down to the value that fee provides to your plan’s participants. Let’s examine financial wellness to understand participant value. In the case of retirement plans advised by Bronfman Rothschild Plan Advisors (BRPA), financial wellness features included in your plan may incur additional service charges. This additional cost may feel like an unnecessary perk, but financial wellness features are extremely popular among participants, providing tremendous value for their long-term financial health and retirement saving journey.
Financial wellness programs cover a wide variety of topics depending on the plan, but they typically include services like one-on-one counseling or group meetings that explore a range of financial topics like budgeting and debt reduction. What you get out of these features illustrates that sometimes the cost of a plan is indicative of its value – “you get what you pay for”.
Seek Fee Structures That Enhance Your Plan
At the end of the day, a plan sponsor must consider all benchmarking information presented to them by their consultant, and possibly by their service providers, to determine what is most reasonable for their organization, and what will bring their employees’ retirement savings the most value.
Fees, in and of themselves, do not have to be a negative aspect of a retirement plan. However, if they are hidden, take away from retirement income, or don’t enhance the overall plan, then they may not be reasonable. When a plan’s cost is presented transparently and associated with specific plan services, they can be appropriately evaluated in terms of value for plan participants.
BRPA Seeks to Improve Overall Retirement Readiness
If you’re reviewing your plan, seek out an advisor that will thoroughly scrutinize your existing cost structure, will benchmark it against competitive plans, and will offer design improvements that deliver value to your employees. BRPA is committed to full transparency when providing retirement plan information and has a benchmarking process that reveals how an appropriate and reasonable cost structure may ultimately provide net-improvements to your plan design and pricing, preparing your workforce for a happy retirement.