The increased number of 401(k) lawsuits over the past several years has shaken fiduciary confidence. Most of the litigation involves claims of excessive plan fees. However, a fiduciary can keep their confidence steady by ensuring they’re providing a top-performing plan. As a reminder, a top-performing plan is one where:
2. The fees paid by the plan are low, and
3. Employees are better prepared for retirement.
Let’s look closer at the second critical element of plan performance, plan fees.
How much does your plan cost?
Before you can determine if your plan’s fees are low or not, you need to determine what fees to include in the assessment. The simple answer is…any and all fees paid by the plan! There may be fees that the employer or plan sponsor has decided to pay from corporate assets. For example, if the plan sponsor pays for the fees charged by the record keeper then these fees do not need to be included. The primary goal here is to make sure the employees are not paying too much for the services of the plan. I trust that any fees paid by an employer are being scrutinized! The fees paid by employees deserve the same, if not a higher, level of scrutiny.
A common mistake made when benchmarking plan fees is to benchmark record keeper fees only. While the fees charged by the record keeper may be the largest portion of the plan fees, they are typically not the only fees paid by the plan. Other fees paid by the plan may include services provided by an adviser, auditor, ERISA attorney, etc.
How do you know if your fees measure up?
To meet the standard as a top-performing plan, the plan’s fees should be in the lowest 50th percentile for plans of similar size. Looking at a twelve month period, add all the fees charged to the plan. Then divide the total dollar amount by the size of the plan to determine the percentage fee (basis points fee). Finally, compare the percentage fee (basis point fee) to the benchmark fee for a plan of similar size.
ABC Company has a retirement plan of $60 million. Over the past twelve months, the plan has paid $76,225 for Record Keeper services, $58,486 for plan adviser services, $10,300 for auditor services, $5,700 for employee education, and $1,685 for ERISA services. Therefore the plan paid a total of $152,396 or about 0.25% ($152,396/$60m x 100). If the 50th percentile fee for plans of similar size was 0.28%, then this plan would be top-performing. The fiduciaries could have confidence they are providing a good plan to their employees.
Knowing and understanding your plan’s fee performance is crucial to ensuring that your plan really serves your employees. If you are unsure of your plan’s actual fee performance, we would be happy to unveil it for you for free!
Next time, we’ll take a closer look at the performance standard for employee retirement readiness.
If you want to know how your plan’s fees ACTUALLY perform (or how your investment lineup measures up), contact us at firstname.lastname@example.org. We would be happy to unveil your plan’s performance using the performance standards discussed here.