Understanding 401(k)Fees (and how to reduce them)

Fees can make a big difference in 401(k) returns. Here’s an overview of fees providers charge.

Fees are a fact of life for any investment instrument. But as a plan fiduciary, it’s your duty to “prudently and solely act in the interest of the plan’s participants and beneficiaries.” That means understanding — and whenever possible, reducing — the cumulative effect of fees and expenses on retirement savings programs.

When it comes to 401(k) and other retirement plans, fees and expenses generally fall into three categories:

Plan Administration Fees These fees cover the day-to-day operation of a plan, such as recordkeeping, accounting, legal and trustee services, and potentially a host of additional services like telephone voice response systems, access to customer service representatives, educational seminars, retirement planning software, investment advice, and electronic access to plan information. Generally the more services provided, the higher the fees.

In some instances, these fees will be covered by investment fees that are deducted directly from investment returns. In other instances, they may be borne, in whole or in part, by the employer or charged directly against the assets of the plan.

Investment Fees By far the largest component of plan fees and expenses is associated with managing plan investments. These fees usually are assessed as a percentage of assets invested. Pay close attention because these fees are often paid in the form of an indirect charge against the participant’s account or deducted directly from investment returns. As a result, these fees may not show up on investment statements.

Individual Service Fees If assessed at all, these fees may be charged separately to the accounts of those who choose to take advantage of a particular plan feature, such as taking a loan from the plan.

Depending on the investment plan, there may be other charges as well, including sales charges (also known as loads or commissions) and management fees (also known as investment advisory fees or account maintenance fees).

Reducing fees

Obviously fees aren’t the only factor to consider when selecting service providers and investments. You’ll also want to consider the level and quality of service and the investment’s risk and potential return.

In any case, you should be fully aware of every fee charged and the ramifications of each. Begin with a review of all charges. Think about the levels of responsibility and specific services you would like from a service provider, such as loans, Internet trading, telephone transfers and retirement planning. Your review should include the number of plan participants and the amount of plan assets as of a specified date.

Once you have a clear idea of your requirements, you are ready to begin receiving estimates for new plans or seeking adjustments for your current plans.

Ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. To help in gathering information and making comparisons, you may want to use the same format for each prospective provider. You can use the very handy uniform fee disclosure form available from the U.S. Department of Labor (www.dol.gov/ebsa/pdf/401kfefm.pdf).

Once you have selected a service provider or investments, be prepared to monitor the level and quality of the services and performance of investments to make sure they continue to be reasonable and suit the needs of your employees. Make provisions to receive information on a regular basis so that you can monitor investment returns and service provider performance. We can help you evaluate different plans — for information, please contact us.

The High Cost of Hidden Fees

A percentage point here, a per¬centage point there. It doesn’t really add up, does it? Indeed, it does. Take, for example, an employee with 35 years until retirement and a current 401(k) account balance of $25,000. According to the U.S. Department of Labor, if returns in the account over the next 35 years average seven percent and fees and expenses reduce the average returns by 0.5 percent, the employee’s account balance will grow to $227,000 at retirement — even if there are no further contributions to the account.

If fees and expenses are 1.5 percent, however, the account balance will grow to only $163,000. That one percent difference in fees and expenses would reduce the account balance at retirement by 28 percent.