Retirement plans such as a 401(k) or 403(b) have an investment component, making them complex to maintain and administer. Employers offering a retirement plan as part of their employee benefit program engage various partners to help operate these plans. Administrators, record keepers, auditors, advisors and investment managers, each play a role and assess fees for their services. The costs may be paid by the employer, from the participant account or shared, and may impact the amount a participant has available to replace their income in retirement.
As little as one percent in administrative fees can have a significant impact on the retirement plans final balance. For example, an employee with a 401(k) balance of $25,000, averaging a seven percent return on investment with half a percent in fees will have $227,000 in 35 years. If, however, the fees and expenses were instead one and a half percent the balance is only $163,000 after 35 years. The one percent difference in fees annually reduces the account balance by twenty-eight percent ($64,000) in retirement.
The industry has seen an uptick in the number of excessive fee lawsuits filed against retirement plan sponsors alleging breaches of fiduciary duty for either excessive fees, high cost investments or for charging participants high record keeping fees. The lawsuits have expanded from large defined contribution plans to smaller plans, nonprofits and universities.
Employers have an obligation to know the costs of operating a plan. There is no requirement to choose the least expensive services, but it is important to understand how the fees are collected, who is being paid, if there are any conflicts of interest and if the cost of services provide good value.
An annual benchmarking of your retirement plan costs will help you assess whether your fees are fair and reasonable. If you are interested in learning more or benchmarking your retirement plans administrative fees please contact us.