Understanding 401(k) Fees: A Guide for Plan Sponsors

As a plan sponsor, you hold a significant fiduciary responsibility to act in the best interest of your employees. A critical component of this duty involves the comprehensive review and management of your company's 401(k) plan, particularly its associated fees. With increasing regulatory scrutiny and a rise in fiduciary-related litigation, a thorough understanding of these costs is no longer just good practice—it is an essential element of prudent plan governance.

This article will outline why 401(k) fees matter, what they entail, and the actionable steps you can take to help ensure your plan remains competitive, compliant, and beneficial for your participants.

The growing scrutiny of 401(k) plan fees

The Department of Labor (DOL) and plan participants are paying closer attention to 401(k) fees than ever before. Excessive or opaque fees can substantially erode an employee's retirement savings over time, leading to diminished outcomes. A seemingly small difference of 1% in annual fees can reduce a final retirement balance by nearly 28% over a 35-year career.

This heightened awareness has contributed to a notable increase in lawsuits against plan sponsors. These legal challenges often allege that fiduciaries failed to act prudently by allowing the plan to incur unreasonable expenses or by not regularly evaluating the cost-effectiveness of investment options.

For HR and finance leaders, this trend underscores the importance of a proactive and well-documented approach to fee management. Failing to monitor and benchmark plan fees can expose an organization to significant legal and financial risks, in addition to damaging its reputation as an employer.

The fiduciary's role in fee management

As a plan fiduciary, your responsibilities extend beyond simply establishing a retirement plan. You must help ensure that the plan operates solely for the benefit of its participants. This includes making certain that all fees paid for plan services—such as administration, recordkeeping, and investment management—are reasonable and necessary.

This duty of prudence requires a deliberate and ongoing process. It involves:

• Understanding the fee structure: Knowing precisely what services are being provided and how much they cost
• Benchmarking: Regularly comparing your plan's fees and services against those of similar-sized plans in the market
• Documenting decisions: Maintaining a clear record of the process used to evaluate and select service providers and investment options

By diligently managing plan fees, you not only fulfill your legal obligations but also enhance the value of the retirement benefit for your employees. A cost-effective plan maximizes the growth potential of employee contributions, fostering greater financial wellness and appreciation for the benefits program.

Key types of 401(k) fees explained

To effectively manage plan costs, it is crucial to understand the different categories of fees. While fee structures can vary, they generally fall into four main types.

1. Plan administration fees

These fees cover the day-to-day operational costs of the 401(k) plan. This includes services such as recordkeeping, accounting, compliance testing, trustee services, and participant communications. Administration fees can be structured as a flat rate per plan, a per-participant charge, or an asset-based fee calculated as a percentage of total plan assets. It is essential to identify how these fees are charged to determine their impact on both the plan and its participants.

2. Investment fees

Investment fees are associated with managing the plan's investment options. They are typically charged as a percentage of the assets invested in a particular fund and are commonly expressed as an "expense ratio." These fees compensate the investment manager for selecting securities and managing the fund. They are deducted directly from the fund's returns, meaning they directly impact the investment performance experienced by participants. Investment fees can often represent the largest portion of 401(k) costs in most plans, making them a primary focus for fiduciary review.

3. Advisor fees

Advisor fees cover the cost of professional services provided by a financial advisor or consultant to the plan sponsor and/or participants. These services may include investment monitoring, fiduciary guidance, plan design consultation, and participant education. Advisor fees can be structured as a flat annual fee, an asset-based percentage, or charged per participant. Transparency around advisor fees is critical, as they directly impact overall plan costs and should be evaluated regularly to help ensure they remain reasonable relative to the value provided.

4. Individual service fees

These are fees charged to participants for specific services or transactions. Examples include fees for processing loans, executing qualified domestic relations orders (QDROs), or managing brokerage window accounts. While not all participants will incur these costs, it is important to ensure they are reasonable and clearly disclosed.

Actionable steps for prudent fee management

Navigating the complexities of 401(k) fees requires a structured and proactive approach. The following steps can help you ensure your plan is both compliant and cost-effective.

Conduct a regular benchmarking review

A formal benchmarking review is the most effective way to determine if your plan's fees are reasonable. This process involves comparing your plan’s costs, services, and investment performance against a database of similar plans based on factors like asset size and number of participants.

A comprehensive review should analyze:

• Total plan cost: The all-in cost, including administrative and investment fees
• Service provider competitiveness: How your current provider's fees and service levels compare to the market
• Investment performance and expense ratios: An evaluation of whether the plan's investment options are performing well relative to their cost

This analysis provides the objective data needed to negotiate with current providers or, if necessary, explore alternatives through a formal request for proposal (RFP) process. We recommend conducting a benchmarking review at least every three years.

Engage a trusted, independent advisor

Working with an independent retirement plan advisor can provide invaluable knowledge and objective oversight. A retirement plan advisor can also act as a co-fiduciary in some cases, sharing in the responsibility of managing the plan prudently.

An advisor can assist with:

• Fee analysis and benchmarking: Providing specialized tools and market knowledge to conduct thorough fee reviews
• Investment due diligence: Establishing and maintaining a process for selecting and monitoring plan investments
• Fiduciary governance: Helping you create a documented process to demonstrate prudence and fulfill your duties
• Provider negotiation: Leveraging industry experience to negotiate more favorable terms with service providers

Engaging an independent advisor demonstrates a commitment to fiduciary best practices and can significantly strengthen your plan's governance framework.

Document your process and decisions

Thorough documentation is your primary defense in the event of a DOL audit or litigation. Maintain a fiduciary file that includes meeting minutes, benchmarking reports, investment review documentation, and records of all decisions made regarding plan fees and service providers. This file should clearly illustrate the prudent process followed by the plan's fiduciaries.

Enhancing value for your employees

Ultimately, diligent management of 401(k) fees is about enhancing the retirement outcomes for your employees. A plan with reasonable fees and strong investment options is a powerful tool for attracting and retaining talent. It sends a clear message that you are committed to your employees' long-term financial security. By taking a proactive role in understanding and managing these costs, you can help ensure your retirement plan remains a competitive and highly valued component of your total rewards package.

To learn more about managing your 401(k) fees, please complete the Retirement Plan Services contact form.

About the author:

Peter Devlin is Vice President of Retirement Plan Services, where he advises corporate customers on retirement plan design, fiduciary governance, compliance, and participant education. He helps employers improve retirement outcomes, reduce costs, and attract and retain talent through thoughtful retirement plan advisory services combined with an integrated total employee benefits solution.

Investment Advisory services provided through Aurora Private Wealth, Inc., a Registered Investment Advisor. Certain representatives of Aurora Private Wealth are also Registered Representatives offering securities through APW Capital, Inc., Member FINRA/SIPC.