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. Equally competent 401(k) providers can charge dramatically different fees for comparable administration services and investments. This variability is a big problem for employers – who have a fiduciary responsibility to protect the interests of plan participants by paying only “reasonable” 401(k) fees. Employers that fail to meet their responsibility can be personally liable for restoring participant losses due to excessive fees.
Employers have a fiduciary responsibility to ensure the fees paid by their 401(k) plan are “reasonable” – so excessive fees do not reduce the investment returns of plan participants needlessly. To do that job, employers should ”benchmark” their 401(k) fees periodically by comparing them to industry averages and/or the fees charged by competing 401(k) providers. Sounds straightforward, but this information is hard to find and often harder to compare on an apples-to apples basis.
Subscribe to the The Frugal Financial Small Business 401(k) Blog and receive this free checklist for help in determing the best 401(k) plan design options and fit for your company.
To plan for retirement, 401(k) participants should set a savings goal and develop a strategy for reaching that goal. To reach their goal at the lowest out-of-pocket cost, I recommend participants follow a simple 4-step strategy – start early, contribute regularly, invest appropriately, and lower fees. However, to reach their goal as soon as possible, participants will need some help from their 401(k) plan. Here are the three 401(k) plan features that can help any saver – including you – retire years sooner.
401(k) plans must operate according to the terms of a written plan document to meet IRS qualification requirements. Most plans use an IRS preapproved document for this purpose. These documents must be fully rewritten (or restated) every six years to reflect recent law changes. The last 6-year restatement cycle was called “PPA” after the Pension Protection Act of 2006. A new cycle - called "Cycle 3" - opened last year. From August 1, 2020 to July 31, 2022, all pre-approved 401(k) plans must be restated onto a Cycle 3 document.
401(k) providers can charge “direct” and/or “indirect” fees for delivering plan administration services such as asset custody, participant recordkeeping, Third-Party Administration (TPA), and professional investment advice. The difference between the fees is how they are paid. Direct fees can be paid by the plan sponsor or deducted from participant accounts, while indirect fees increase the cost of plan investments – reducing their returns. If you’re a business owner, I strongly recommend you avoid indirect fees for two reasons – 1) they lack the transparency of direct fees – which makes excessive 401(k) fees harder to avoid and 2) they could limit your access to top 401(k) investments - which often pay no indirect fees.
If you have questions about Transamerica 401(k) fees – how they work, how much they cost on average, or how you can find & calculate them for your plan – you’ve come to the right place. In this guide, we’ll show you how to calculate the full cost of a Transamerica 401(k) plan using their DOL-mandated fee disclosure.