I meet a lot of 401(k) plan sponsors unsure they’re paying “reasonable” fees to their 401(k) provider for ”necessary” services – an important 401(k) fiduciary responsibility. I can hardly blame them when I consider the broad range of fees charged by 401(k) providers today.
If you’re one of these plan sponsors, I have a simple recommendation to avoid excessive 401(k) fees - pay a 401(k) provider as little as possible for “commodity” services like participant recordkeeping and only pay extra for “value-added” services that help plan participants save more for retirement. Basically, all competent 401(k) providers perform commodity services well, while not all providers offer “value-added” services.
In truth, most 401(k) plan administration and investment services can be best described as commodities. However, there are a few legitimate “value-added” services out there. Below are four of the major ones.
Fiduciary-grade investment advice
In my view, the baseline for 401(k) plan investments services is a fund lineup comprised of index funds and Target-Date Index Funds (TDIFs) that’s modeled after the Federal government’s Thrift Savings Plan (TSP). Such a lineup delivers reliable, diversified market returns and low-cost investment advice to plan participants when they invest 100% of their account in the TDIF that best matches their estimated retirement date.
However, 401(k) plan participants will sometimes need or want one-on-one coaching, personalized investment advice or the opportunity to pursue different investment strategies. In these cases, it can be well worth paying additional 401(k) fees for an impartial fiduciary-grade financial advisor.
A dedicated plan manager
When 401(k) plan sponsors have questions about their plan, they often need a quick and trustworthy response to protect the interests of plan participants. And yet, many 401(k) providers don’t provide a dedicated plan manager for sponsors to contact when they have questions. Instead, they force sponsors to phone a call center or submit an online support request.
Because anonymous call centers or online support systems rarely – if ever - deliver the same quality of care as a trusted consultant, it’s usually worth paying more to get a dedicated plan manager.
Advanced plan design and nondiscrimination testing
Small businesses can have dramatically different goals for their 401(k) plan. While some want to maximize contributions for business owners, others want to incentivize rank-and-file contributions. The process of matching a company’s 401(k) goals to available options is called 401(k) plan design. It’s important for 401(k) plan sponsors to understand their 401(k) plan design options because the consequences of making poor choices can be severe – including thousands of dollars in unnecessary plan expenses, poor employee participation, or annual plan testing failures.
For many 401(k) plan sponsors, an “off-the-shelf” safe harbor 401(k) plan design will meet their company’s retirement plan goals just fine. However, if a more complicated design – like new comparability – is desired, it’s worth paying more for a 401(k) provider with the expertise to complete the nondiscrimination testing necessary to support the design.
Regardless of plan design, 401(k) plan sponsors should only pick a 401(k) provider with a strong expertise in coverage testing because even the most basic 401(k) plan design will require this testing annually – and the consequences for failing this test can be brutal.
A directed trustee is basically an asset custodian that ERISA defines as 401(k) plan fiduciary. I’ll be honest, fiduciary status doesn’t mean a directed trustee will do a better job than a custodian at executing plan trades, processing participant distributions, etc. However, they do tend to offer more robust trust reporting than a custodian – like monthly trust reports or certified annual statements. This additional reporting can help ensure a 401(k) plan’s assets are safe.
Don’t expect to “get what you pay for!”
In a 2016 small business 401(k) fee study, we found insurance, payroll and mutual fund companies charged the highest fees for 401(k) plan administration and investment services. Unfortunately, that doesn’t mean these providers deliver the most valuable plan services.
If you’re a 401(k) plan sponsor, you shouldn’t pay 401(k) provider fees that exceed the value of their services. Instead, you must match them to protect plan participant interests and avoid fiduciary liability. The key to meeting this responsibility is paying as little as possible for competent and value-added services.