How to Avoid Paying Too Much in Retirement Plan Provider Fees

The following excerpt is from our ebook, “Finding the Right Retirement Plan Provider,” which you can download by clicking here.

Fees are a hot topic in the retirement plan marketplace due to their potential negative effect on long-term account growth.

In 2012, the Department of Labor (DOL) passed fee disclosure regulations. The regulations were designed to help employers and plan fiduciaries understand the true cost of their plan (many believe their plan is “free” since they don’t receive an invoice or see transactions on their statements) to help them determine if the fees charged are reasonable for the services provided.

The DOL’s intention was not to promote the lowest cost plan. It was to create awareness and transparency for plan fees and, thereby, ensure reasonable fees for various plan services. They focused on fees charged to plan assets, but even if you pay fees outside of the plan, you should know how you compare to your peers.

Are You Paying Too Much in Fees?

Reasonable fees are not necessarily the lowest fees. Compare the list of services you’re using with the list of services you’re paying for. If you are paying for services you aren’t using, your fees are unreasonable. In order to evaluate the reasonableness of the fees you’re paying, you need to benchmark your plan.

A Simple Way to Benchmark Your Plan

Benchmarking software is available, but it should not be taken as gospel truth. Many apps rely on publicly available data, like the DOL’s Form 5500 database. These databases may be outdated and not entirely accurate.

To get a proper benchmark for your fees, find out what other providers would charge for your plan’s demographics. Get proposals to see how they price comparable services. If your fees are higher, ask your provider for a lower price.

If they can’t match or beat the price for the same or better services, it’s time to change providers. Remember, reasonable doesn’t mean “cheapest,” it just means they’re not overcharging you.

Be careful to ensure you are comparing similar services. You want to compare apples to apples. If someone offers lower costs but doesn’t offer all the services you need, they shouldn’t enter the comparison.

Know Where the Hidden Costs Are

Review your plan investments. This is typically where extra compensation to service providers are hidden. Identify hidden costs by understanding share classes, revenue sharing, and plan-level fee disclosures.

Many mutual funds and other investments offered through a retirement plan have different versions available (referred to as share classes) that differ only in the amount of revenue they share with other providers (the actual investment management fee charged is usually the same across all classes).

The investment objective and fund management style is the also the same for all classes of a mutual fund, the biggest difference is the total expense ratio for the fund.

Adding vendor compensation to the cost of an investment is referred to as revenue sharing, or indirect compensation, and is legal when properly disclosed. Employers often have difficulty understanding the disclosures and properly determining if a provider’s total fee is reasonable.

Be sure you are using the lowest cost share class available and ask your vendors if there are ways to access funds with higher minimum investment requirements (and lower total costs) as part of the retirement plan. Ask your providers to strip out revenue sharing if possible.

You can identify your plan’s hidden costs by reviewing the plan-level fee disclosures (also referred to as a 408(b)(2) disclosure). This is the notice required by the DOL for all covered plan service providers that explains how much direct and indirect compensation is paid from plan assets to each provider.

To avoid participant confusion (and potential liability), make sure fees are fully disclosed and transparent. If they aren’t, the DOL is holding employers responsible—not the providers receiving compensation.

When Is It Time for a Review?

You know how to benchmark your plan and review your plan investments, but when should you do it?

Review your investment costs every year and your service provider fees every two to three years (if not annually). By doing this, you can ensure your fees are competitive with market rates.

A review of your plan’s vendors doesn’t always need to result in a provider change. You just want to periodically review and document the pricing and services of your current vendors to make sure everything remains reasonable.

Click here to download the rest of our ebook, “Finding the Right Retirement Plan Provider.”


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