Confused About Your Retirement Benefits Fees? Allow Us to Explain…
As a small business owner or manager, you probably know exactly how much you spend a year on the building or office space where you run your company. You likely also know what you dole out in salary and probably have some idea of what you spend on office supplies and equipment.
You might also be aware of your costs for common HR expenses, such as health benefits. However, do you know what you pay in 401(k) plan fees? If you answer this with “I don’t pay any fees,” you are likely wrong. You are also not alone.
There are costs associated with the investment management and plan administration within a 401(k) plan that are generally passed back to the participants to pay. However, far too often, these participants have no idea they are paying these administrative costs. My goal in this post is to inform you about the costs you may unknowingly be paying and to educate you on the process.
Retirement fees can be significant
Based on the 401(k) Averages Book, a 401(k) plan with 100 participants and $5,000,000 in assets has average plan fees of 1.25%. That’s $62,500 in annual plan fees. Since plan account balances compound over time, these fees can amount to several hundred thousand dollars in lost savings over the course of one individual’s retirement savings.
What employers don’t understand about 401(k) fee disclosures can hurt them
The Department of Labor (DOL) implemented required annual fee disclosure notices in 2012. 401(k) plan providers and investment advisors who are collecting revenue out of plan assets are now required to provide an annual fee disclosure notice to plan sponsors. This notice is referred to as a 408(b)2 notice for plan administrators and a 404(a)5 notice for plan participants.
The intent of these notices was to draw more attention to plan fees but the impact to date has been lukewarm. Many employers have not taken the time to understand the notices and not all provider notices are easy to understand.
This lack of understanding of 401(k) rules has been great for employment attorneys. There have been over 100 lawsuits filed by employees who have sued their employer over excessive 401(k) plan fees. While many employers are paying large sums to settle out of court, Tibble v. Edison International actually made it all the way to the U.S. Supreme Court before receiving a ruling in favor of the employees. If nothing else, this should be a wake-up call for employers that they need to understand their plan fees and perform their due diligence in this area
How employers can maintain 401(k) compliance
It is important to note that, while the DOL does not require a 401(k) plan sponsor to choose the provider with the lowest fees, they are tasked with being able to demonstrate that their plan fees are reasonable. The DOL’s guidance recommends a plan conduct a fee benchmarking or provider request for proposals (RFPs) at least every three years.
If you offer your employees a 401(k) plan, you must take the time to:
- Understand your plan fees.
- Benchmark those fees to demonstrate they are reasonable.
- Keep documentation of your due diligence, such as the proposals you’ve received from plan providers and the results of your fee benchmarking research.
Failure to take action in this area could end up being costly. Hiring a professional employer organization is an excellent move toward managing your retirement plan for compliance and transparency. TriNet clients, for example, have the ability to participate in the TriNet 401(k) plan through Transamerica. Under this arrangement, TriNet serves as the plan administrator and assumes fiduciary liability around plan administration, including the monitoring of investments and plan fees. TriNet is responsible for performing due diligence to demonstrate and document that plan fees are reasonable. With economies of scale in play, the investment and administrative fees in the plan are generally lower than what clients would get if they were able to sponsor their own plans.
This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.
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