Benchmarking Fees for 401(k) Plans [Updated for 2019]

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Benchmarking Fees for 401(k) Plans [Updated for 2019]

Fee transparency has become a major focus of the Department of Labor in recent years. It is incumbent on plan sponsors to document that they are meeting all requirements for fee evaluation. Sponsors should guarantee that all compensation paid to service providers is reasonable in terms of the services provided.

Having a fiduciary process for assessing the plan’s fees, and thereby providing the most reasonably priced plan for employees, can help plan sponsors remain compliant with regulatory agencies. This four-question guide, adapted from TIAA, may serve to help plan providers accomplish this fiduciary duty and benchmark their plan’s fees.

1. Who is receiving compensation from the plan? 

It is important to identify all of the service providers operating within the plan that receives compensation. Plan sponsors should then document all information regarding their qualifications, abilities, and quality of service. It is considered a best practice to have the work of service providers regularly documented and monitored.

A set measure of criteria can ensure the effectiveness of service providers and manage against any conflicts of interest.  Collecting and reviewing the plan service providers’ required disclosures, and reading through them to verify what is enclosed, is an essential component to benchmarking fees. A plan fiduciary should clarify any questions with the service providers.

2. What are the fees and expenses associated with the plan? 

The plan provider should fully understand the fees associated with the plan. This includes understanding record-keeping offsets and participant fees. Some plan providers find it helpful to consider an all-in fee approach to determine the total plan costs.

In addition, it might be prudent to categorize fees into groups such as administrative, investment, and individual. This can assist in understanding what services are being included in the plan and what the costs are. Plan fees should be communicated well to employees and information gathered should result in a strong participant fee disclosure.

3. How do the fees and expenses compare to other service providers or investment options? 

An adviser can assist the plan fiduciary with benchmarking fees for the plan. The lowest fee is not always the best value. It is, therefore, a good practice to evaluate all fees, the quality of services received, and how these services are improving plan outcomes. Once fees have been benchmarked, changes may need to be made.

4. Why is the compensation warranted? 

When evaluating fees, the plan fiduciary should catalog all of the services that are included. This can be organized so as to prioritize the services according to what is of highest value to the plan. It is wise to evaluate the total value of the services, including their role in the long-term success of the plan. Do the services provided match the plan objectives? An adviser may help the plan fiduciary to identify retirement readiness metrics for the plan, as well as the services included in the plan fees.

Benchmarking fees in a 401(k) plan is an important fiduciary duty and should not be overlooked. If needed, contact an adviser to help evaluate and make any necessary changes.

Samuel J. Sweitzer
Samuel J. Sweitzer
Founder and President of Anson Analytics, Inc. - an RIA firm specializing in Research Based Investment Management for Corporate Retirement Plans and Private Investors. Sam is a Chartered Financial Analyst (CFA) and currently serves as Anson's Chief Investment Officer. Sam resides in South Metro Atlanta with his wife and two daughters.

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