The Frugal Fiduciary Small Business 401(k) Blog
Get the latest industry news, deadlines and tips you need to know to help tackle your fiduciary responsibility needs.
There are few industries where the phrase “you get what you pay for” is less applicable than the 401(k) industry. That’s because equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments. This variability is a big problem for business owners – who have a fiduciary responsibility to protect the interests of their 401(k) participants by paying only “reasonable” fees from plan assets. If an owner fails to meet their responsibility, they can be personally liable for restoring participant losses due to excessive fee payments.
Would you buy a product if you didn’t know its cost? I doubt it. What if overpaying for that product could lead to serious consequences like being sued or postponing retirement? I know you’re not buying then. And yet, I see business owners do something similar all the time. They’ll hire a 401(k) provider without fully understanding their fees. Even when they know that paying excessive 401(k) fees could get them sued or force plan participants - including themselves - to work longer than necessary to afford retirement.
The Department of Labor (DOL) divides 401(k) fees into two categories – administrative fees that can be paid from plan assets, and settlor fees that can't. It’s up to the 401(k) plan sponsor to decide whether to pay administrative fees from plan assets or a corporate bank account. If they choose plan assets, they have a fiduciary responsibility to allocate the fee among plan participants in an equitable manner.
The most expensive thing most people will buy in their lifetime is retirement. Perhaps you’ve never thought of “buying” retirement, but that’s exactly what you do when you contribute to a 401(k) plan – you’re saving today to afford income in retirement. When you consider that income may need to last 10, 20, even 30 years, it’s easy to understand why retirement is not cheap.
All 401(k) plans require three basic administration services – asset custody, participant recordkeeping and Third-Party Administration (TPA). A 401(k) provider can be paid “direct” or “indirect” fees from plan assets to deliver these services. Direct fees are deducted from participant accounts, while indirect fees are paid by plan investments. The most common form of indirect fee is revenue sharing. Below are five reasons why employers should pay direct fees for 401(k) administration services instead.
If your 401(k) provider is an insurance, mutual fund or payroll company, there is a good chance your 401(k) fees are too high. If you’re a business owner, you have the power to lower them, but you may need to switch 401(k) providers to do it. This move can seem daunting if you have never done it before.