401k True Cost Comparison
The good news for 401k participants is that mutual fund costs have been going down over the last 15 years (source: Investment Company Institute, June 2013). The bad news is that many sponsors and participants may still be paying more than they should for a well diversified, comprehensive defined contribution plan. One of the unfortunate phenomena of 401k and defined contribution plans is that the actual cost, particularly to the participants, can be difficult to decipher in the maze of data and information that is dumped on to the sponsors and participants. While the 408b2 disclosures have certainly helped, I wonder how many sponsors and participants really know what they are really paying. Perhaps the more important question is "Does anyone pay attention, given the complexity of the data?" Of course, it's the fiduciary's responsibility to make sure their actions are in the interest of the beneficiaries and participants.
While not exhaustive, here are some costs that sponsors should look at carefully when they compare their plan to others:
1. Set up fee or conversion fee.
2. Annual recordkeeping/admin TPA fee
3. Per Participant Annual fee
4. 5500 preparation fee
5. Fidelity bond fee
6. Custodial fee
7. Advisor fee
8. Average mutual fund expense
9. Recordkeeping asset fee
10. Other fee(s)
It would be recommended to see what the cost would be over a number of years, since costs tend to add up over time. Of course, cost is not the only thing that is important. Quality service and other bells and whistles may justify higher costs, but I would maintain that cost should be a priority.
I suspect that as competition continues to heat up in the 401k markets, and sponsors/participants become more aware of these costs, they will become more sensitive to how they choose their 401k service providers.