BlogsThe Facts of 401(k) Management Fees
July 8, 2015, by Matt Hanson
The Facts of 401(k) Management Fees
Offering 401(k) benefits is a smart, and often necessary, tool for employee recruitment and retention. However, it is not as easy as throwing together a few options and hoping for smooth sailing. Retirement plans carry with them significant responsibility for employers, and while the resulting benefits are worthwhile, it is also crucial to understand all the rules and regulations that surround the management of 401(k) plans. This includes and should emphasize the role of management fees.
The Role of a Fiduciary
According to the Department of Labor, under the Employment Retirement Income Security Act (ERISA), plan fiduciaries (in this case, employers) must act in the best interest of employees, make decisions prudently, diversify plan options and ensure the employee is paying only reasonable fees. The duties were upheld by a recent Supreme Court case, Tibble vs. Edison. Consequently, employers must digress from autopilot monitoring and take on an involved position that particularly watches out for high fees.
The Impact of a Fee
Because 401(k) plans are long-term investments, a small change in a management fee can result in significant loss when it comes time to cashing out the fund. In the Tibble vs. Edison case, the plaintiffs sued their employer because the plan manager charged much higher fees than what was available for the same mutual fund in the wholesale market.
Three primary fees to be aware of include:
- Plan Administration Fees: Covers the daily operation and administration of the account, including accounting, bookkeeping, legal, etc.
- Investment Fees: The most significant fee, investment fees are deducted from the returns and cover the costs to manage the plan.
- Individual Fees: These fees are unique to each participant. An individual fee may incur if a participant chooses to take out a loan against their account.
Beyond plan administration fees, there are also charges that a participant will incur when they make investment choices, like sales charges when buying or selling shares.
Consider this example to see how a slight increase in fees drastically changes the net result of money:
An employee has $25,000 in her retirement account for the next 35 years. The account will grow on average by 7%, but will be reduced by 0.5% because of fees. Even with no further contributions, the account will grow to $227,000 by retirement. But, if her fees are increased to 1.5%, her account will only grow to $163,000. That is a 28% reduction.
Working with Subject Matter Experts
If an employer’s firm is not staffed with experts in the field of investment management, it is a smart decision to seek an outside provider for investment knowledge and consultation. However, even with this assistance, employers still must have a process in place to review plans and ensure reasonable fees. Centennial is a proud member of the Retirement Plan Advisory Group, managing nearly $40 billion in 401(k) assets. If you need help in your plan management and monitoring, speak with us today. We’re ready to help you provide long-term benefits to your employees while ensuring compliance on your end.