Hidden Fees in Retirement Plans: How Plan Sponsors Can Protect Their Employees’ Savings
As a plan sponsor, you have a responsibility to provide your employees with a retirement plan that not only helps them save for the future but also safeguards their hard-earned money. However, many retirement plans, especially 401(k) plans, are riddled with fees that can significantly impact your employees’ savings.
This blog post will help you understand the various fees, both visible and hidden, that can affect your retirement plan. We will also discuss the importance of partnering with an expert financial advisor and the benefits of benchmarking your plan to protect your employees’ savings.
1. Recognizable Retirement Plan Fees
You are likely aware of some common fees associated with retirement plans, such as:
- Plan Administration Fees: Covering administrative tasks like record-keeping, legal compliance, and customer service, these fees can range from 0.2% to 2% of assets or be charged as a flat fee.
- Investment Management Fees: Charged by investment managers for managing mutual funds, ETFs, or other investment options in your plan, these fees usually range from 0.1% to 1.5% of assets and are included in the fund’s expense ratio.
- Advisory or Management Fees: If you employ a financial advisor to manage your 401(k) investments, you may incur additional advisory or management fees, typically ranging from 0.25% to 1% of assets under management.
2. Uncovering Hidden Fees
In addition to the more visible fees, there are lesser-known and hidden fees that can erode your employees’ retirement savings:
- Expense Ratios: Representing the cost of managing and operating investment funds in your plan, these fees are often embedded in the fund’s price and can range from 0.05% for low-cost index funds to over 2% for actively managed funds.
- 12b-1 Fees: Marketing and distribution fees charged by some mutual funds and included in the fund’s expense ratio, these fees are generally capped at 1% of assets.
- Trading Costs: Although not explicitly listed as fees, trading costs incurred when a mutual fund or ETF buys or sells securities can impact a fund’s overall return.
- Revenue Sharing: Mutual fund companies may pay a portion of their fees to the 401(k) plan provider for including their funds in the plan. Revenue-sharing payments can range from a few basis points to over 0.5% of assets.
- Float Fees: Generated when employees’ contributions or withdrawals are temporarily held in a non-interest-bearing account before being processed, float fees can vary based on the plan provider and transaction processing efficiency.
3. The Benefits of Partnering with an Expert Financial Advisor
Collaborating with an expert financial advisor can provide valuable insights into retirement plan fees and help protect your employees’ savings:
- An advisor can review your plan’s fee disclosures, identify hidden or excessive fees, and recommend cost-effective investment options.
- Advisors can educate your employees about the fees associated with their retirement plan and help them understand how to minimize their impact.
- A financial advisor can provide ongoing support and guidance to help you fulfill your fiduciary responsibilities as a plan sponsor.
4. The Value of Benchmarking Your Retirement Plan
Benchmarking is a prudent exercise for fiduciary committees to ensure that their retirement plan remains competitive and cost-effective. By comparing your plan’s fees, investment options, and services to industry standards or similar plans, you can identify potential areas of improvement or risk:
- Benchmarking can reveal underperforming areas or excessive fees within your plan.
- It can help you evaluate the effectiveness of your plan’s investment options and overall investment strategy.
- Regular benchmarking can demonstrate your commitment to acting in the best interests of plan participants and help you fulfill your legal obligations under ERISA and other regulations.
- By identifying potential risks and compliance issues, benchmarking can protect your employees’ retirement savings and ensure that the services provided by your plan’s vendors are in line with the fees charged.
As a plan sponsor, your employees’ retirement security is a top priority. Ensuring that their hard-earned savings are protected from unnecessary costs requires understanding the various fees associated with your retirement plan and taking proactive steps to minimize their impact.
Partnering with an expert financial advisor and regularly benchmarking your plan can help you identify and address hidden fees and other issues that may be affecting your employees’ retirement savings. By staying proactive and well-informed, you can fulfill your fiduciary responsibilities and support your employees on their journey to a secure financial future.
Blaise Stevens
CFP®, AIF®, CLU®, ChFC®
Managing Member
(336) 790-2560
