We have closely monitored the trends in fee levels for corporate 401(k) plans over the past five years. With increasing scrutiny on retirement plan costs, there has been a notable shift towards greater transparency and cost-effectiveness, particularly for larger plans with over $10 million in assets. We have lowered our fees to remain below market, in relation to the trend levels. We recommend demanding a benchmark review if you find your company is paying fees in excess of what we outline below.
Administrative Fees
Administrative fees cover the day-to-day operations of a 401(k) plan, including recordkeeping, accounting, legal services, and participant support. From what we have seen over the past 5 years, administration fees have been steadily declining across the board.
This downward trend can be attributed to several factors:
Increased competition: The 401(k) administration market has become more competitive, with providers vying for larger plans by offering more competitive pricing.
Economies of scale: Larger plans can leverage their size to negotiate lower administrative fees with providers, as the fixed costs are spread across a broader asset base.
Fee transparency: Heightened regulatory scrutiny and participant awareness have prompted plan sponsors to closely examine administrative fees and seek more cost-effective solutions.
Many large employers have also adopted a best practice of paying administrative fees directly from company assets rather than passing them on to participants, further reducing the burden on employees' retirement savings.
Investment Management Fees
Investment management fees, also known as expense ratios, are charged by the underlying mutual funds or investment products within a 401(k) plan. These costs are declining as well.
This trend can be attributed to:
Increased adoption of index funds: Low-cost index funds and exchange-traded funds (ETFs) have gained significant popularity, putting downward pressure on actively managed fund fees.
Institutional share classes: Larger plans can access lower-cost institutional share classes of mutual funds, which have lower expense ratios than their retail counterparts.
Fee compression: Heightened competition among fund managers has led to a compression of fees, particularly in popular asset classes like large-cap equities.
Other Fees
In addition to administrative and investment management fees, 401(k) plans may incur other fees, such as:
Recordkeeping fees: These fees cover the costs of maintaining participant records and processing transactions. For larger plans, recordkeeping fees have remained relatively stable.
Advisory fees: Some plans offer investment advisory services, either through third-party advisors or managed account solutions. Advisory fees we see have generally ranged from 0.25% to 0.50% of assets under management, depending on the level of services provided.
Revenue sharing: Some investment products may share a portion of their fees with the plan's recordkeeper or administrator. Fee sharing between one provider and another tends to be frowned upon. It typically creates conflicts of interest and often leads to higher overall fees. Whenever there is an opportunity to reduce conflicts of interest, it pays to do so. In keeping with our advice, revenue sharing practices have come under increased scrutiny by the regulatory agencies. Avoid vendors participating in revenue sharing practices.
401(k) plan costs continue to move lower despite the recent inflationary economy. Technology and economies allow fewer HR hours spent dealing with 401k administration, at a reduced cost.
Your 401k plan advisor should be performing a benchmarking every year which compares your plan to others of similar size to ensure you are not over-paying. If this benchmarking analysis is not taking place, it may be a sign that your advisor does not want you to know you are overpaying – or that better options are available.
In short, if your plan administrator hasn’t benchmarked your plan, demand one or find a new provider.
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