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In a small business, employees’ value often goes far beyond their job descriptions. They become advocates for your vision, brand ambassadors for your business and standard-bearers for the kind of company you set out to create. When good people are working toward your vision, it feels good to give back to them with benefits that prepare them for a comfortable future in retirement.
In the past, making sense of 401(k) plans hasn’t always been easy, but new rules requiring 401(k) plan providers to disclose their fees and associated services are starting to change that.
“Thanks to the new fee disclosure rules, everyone is now in a much better position to understand fees,” says Scott Rice, group vice president and director of plan administration for SunTrust’s employee benefit solutions division. How and what you are being charged should appear in your plan’s 404(a)(5) and 408(b)(2) statements, which detail plan-level participant-related expenses and investment-related expenses, respectively. However, these statements can be lengthy and difficult to decipher. Don’t be afraid to ask for more clarity if you can’t make sense of things. “If you’re not getting the information you need, it may be time to look for a new vendor,” Rice says.
Determining if fees are reasonable
Plan sponsors have a fiduciary responsibility to assess and monitor the reasonableness of fees. Benchmarking studies are a good place to start researching how your plan stacks up against industry norms. Organizations such as Fiduciary Benchmarks Inc. provide detailed information on fee ranges and trends across the industry, for a fee. You may also be able to access free resources that provide more general information.
On average, fees for services such as plan administration, investment management and individual services like taking out a loan from your 401(k) plan range from less than 1 to 2 percent of the total assets invested in the plan. But fees don’t exist in a vacuum; they vary depending on the type of plan, the level of services offered and how those services are delivered—something benchmarking reports don’t necessarily reflect.
“Determining what is reasonable is very subjective,” Rice says. Plan-specific variables or complexities can only be assessed by requesting bids from several vendors using the features that align with what you want from a plan.
Once you have a set of bids, you can compare apples to apples with your plan provider. “There may be room for negotiation,” Rice says. For instance, if the number of participants in your plan is low, but the total assets are high, you may be able to negotiate a lower per-participant fee. Alternatively, if you’re paying a lot for a service you don’t use, see if you can drop it from the plan.
Factors that impact fees
How fees are calculated can vary widely from plan to plan, but there are some key factors to keep in mind:
Some fees are based on the number of participants or as a percentage of the total assets invested.
Fees for fixed-rate services do not vary, regardless of size or type.
Certain services such as toll-free-number access, investment advice or participant education may come at a cost.
Investment choices also affect fees. For instance, passively managed index funds generally cost less to manage than actively traded mutual funds.
Individual sales transactions may also carry a premium.
Fee disclosures have made it easier for sponsors to determine the overall value of their retirement plans. But knowing what you’re paying for is only the first step. Conducting a comparative analysis will show you if your plan is competitive and minimize some of your fiduciary risk along the way.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.