How to know if your 401(k) fees are reasonable
There are a lot of Americans saving in 401(k) plans. Like, a lot. Roughly 54 million Americans hold an estimated $5.3 trillion in assets in 401(k) plans, and that number is on the rise . That’s a lot of plans, holding a lot of money, all relying on some level of specialized services with associated fees to keep them running smoothly. From consulting and advising to recordkeeping and administration, these fees ensure that a business is compliant and investments are appropriate. But how do you know if the fees you are being charged for your 401(k) are reasonable?
How to assess if your 401(k) fees are reasonable
A 401(k) retirement savings plan is a cost-effective way to offer flexibility to both the employer and the employee. And because 401(k) plans can differ, so will their fees. Assessing what is “reasonable” quickly becomes subjective and really depends on the types of services your plan provides. A plan that offers employer contribution matches or profit sharing may cost more to administer—and therefore will likely have more fees. Other plans may be more bare-bones, no frills attached, and come with less fees. Remember, you get what you pay for. It’s not always a prudent idea to go with the plan that is cheapest. Look at plans that align with company values and culture.
Where to find 401(k) fee allocation
First and foremost, the plan sponsor or an investment committee should have a good understanding of the fees associated with the retirement account. It will be their responsibility to ensure that participants receive education. Both plan-level and investment-related information, including fees, will be provided before a participant’s initial investment and annually after that.
If you aren’t sure where fees have been charged each year, check out your 408(b)(2) form—that’s a great place to start. The document makes it easier for plan fiduciaries to assess the “reasonableness” of the fees paid. And to alleviate doubt, review the plan and associated fees regularly. You’ll want to both benchmark the fees and add a healthy dose of common sense. If you gut is telling you something is too expensive, it often is. Don’t expect to be an expert at this at first, either. You’ll likely need to do some initial research, and industry experts suggest doing a more in-depth review every three years.
To keep the plan participants up-to-date, the law requires that a 404(a)(5)—a record of fees such as the cost of investments, administration, and recordkeeping—is provided annually. Plans should also be reviewed each year to ensure all participants are on track to meet their 401(k) retirement savings goals.
Finding a plan or service provider that advocates a policy of transparency
Fees are an expected part of a 401(k) plan, but excessive fees can cause people to look for different plans. Plan sponsors should align themselves with 401(k) service providers or third party administrators that endorse “full disclosure” principles. All fees will be clearly identified up front by the provider or third party administrator for both the plan sponsor and the participants.
When you begin assessing your 401(k) fees and determining if they’re reasonable, don’t be afraid to ask questions. It’s important to stay educated on what the fees mean, what they actually pay for, and how they can affect the overall health of your plan.