Summer 08 - Plan Expenses: How Much is Too Much?
surrender and transfer charges … investment management fees … 12b-1 fees.
Among other duties, the Employee Retirement Income Security Act (ERISA) requires that those
responsible for managing retirement plans ensure that the services provided to their plan are
necessary and that the cost of those services is reasonable.
The Challenge of Apples to Oranges
Unfortunately, most companies reviewing proposals for a new or takeover plan do not have a system
in place to compare plan expenses. They have no way of knowing if the expenses being paid on
their 401(k) plan are “reasonable.” And the investment companies don’t help; each provider has a
different format for presenting the information, making an apples-to-apples comparison difficult.
While fee structures in 401(k) arrangements can be very complex, as a general rule, fees are
calculated in four ways:
- Asset-based: Expenses are based on the amount of assets in the plan and generally are expressed as percentages or basis points.
- Per-person: Expenses are based upon the number of eligible employees or actual participants in the plan.
- Transaction-based: Expenses are based on the execution of a particular plan service or transaction.
- Flat rate: Expenses are reflected in a fixed charge that does not vary, regardless of plan size.
Note that fees may be calculated using one or any combination of these methods. Plan
administration-related expenses can also be charged as one-time fees or ongoing expenses. Onetime
fees are typically related to start-ups, conversions (moving from one provider to another) and
terminations of service. Ongoing fees are recurring expenses relating to continuing plan operation.
Active vs. Passive Management
In addition, funds that are “actively managed” (i.e., funds with an investment advisor who actively
researches, monitors and trades the holdings of the fund to seek a higher return than the market as
a whole) generally have higher fees than funds that are “passively managed.” Remember that
neither active management nor higher fees necessarily guarantee higher returns.
Funds that are “passively managed” generally have lower management fees. Passively managed
funds seek to obtain the investment results of an established market index, such as the Standard
and Poor’s 500, by duplicating the holdings included in the index.
Weigh Your Options
Understanding and evaluating plan fees and expenses associated with plan investments and
services are an important part of a fiduciary’s responsibility. Consider following these general
guidelines to establish an objective process to aid in your decision making:
Decide what you want. Before negotiating with service providers, think about the specific services
you would like (e.g., legal, accounting, trustee/custodian, recordkeeping, investment management,
investment education or advice). Include the types and frequency of reports you wish to receive,
communications to participants, meetings for participants, and the frequency of participant
investment transfers.
Request estimates. Once you have a clear idea of your requirements, you are ready to begin receiving
estimates from prospective providers. Give each of them identical information about your plan and the
features you want. This information should include the number of plan participants and the amount of plan
assets as of a specified date. In addition, ask each prospective provider to be specific about which services
are covered for the estimated fees and which are not.
Compare apples to apples. When making comparisons, use the same format for each prospective provider. The U.S. Department of Labor offers a downloadable 401(k) Plan Fee Disclosure Form on its website (www.dol.gov/ebsa/pdf/401kfefm.pdf). The form can help you compare investment product fees and plan administration expenses charged by competing service providers, regardless of how a particular service provider structures its fees.
Ask the right questions. Make sure prospective providers know you are paying attention to fees and
expenses. Ask questions such as, “How are you paid?” “How do these fees compare to industry averages?” “How do they compare to other plans designed like ours?"
Consider calling in the pros. There are a variety of firms that can assist in evaluating your plan fees and expenses. Accounting firms such as Bober, Markey, Fedorovich & Company are skilled at this type of evaluation.
Monitor. Once you have selected a service provider or investments, be prepared to monitor the level
and quality of the services and performance of the investments to make sure they continue to be
reasonable and that they suit the needs of your employees. For example, request that your provider
conduct a performance analysis at least annually of investments utilized by the plan versus
benchmarks and/or peer groups.
A Word About Quality
Remember, your fiduciary obligation is to make prudent decisions for participants based on facts—
not get the cheapest rates and fees. Ultimately, you get what you pay for.
The bottom line is that it’s okay to pay for service — just make sure you’re getting service that adds
value to the plan and to your employees.
Benefit Plan Advisor is produced quarterly by Bober Markey Fedorovich’s Employee Benefit Plans Services Team. If you would like additional information about the services we provide, please contact James E. Merklin, CPA, CFE, M.Acc. at (330) 762-9785 or by email.
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Unless expressly stated otherwise, any U.S. tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
© 2008 Bober, Markey, Fedorovich & Company