I work for a small company, 5 employees, our retirement plan has a safe harbor and 401k option. We have over $500,000 in the plan. All of the underlying funds that I have invested in have low fees in their peer group when I look up their ticker but the plan service provider tacks on another 0.5-1.0 to the expense ratio. How much should my company pay the 401K plan service provider? Is it possible to reduce these costs? How?
Hi Drew, I agree Chace's comment is spot on. However, more than 1% all in high for a plan your size. You should seek an RIA that will be the plan's Fiduciary Advisor and provide value for the fee that you are paying: The Advisor should provide an independent look at the plan structure and fund lineup. A good Advisor can help negotiate the TPA fees. They should help relieve the company of some of the burden of administering the plan and provide guidance and assistance on the plan governance. They should provide benchmarking of the funds in the plan lineup vs peer group regularly. And they should provide more than just basic education for plan participants.
Hi Drew, Chace's response is spot on. Although 1-1.5% is high for the 401k space, it's a current reality for smaller plans. Fees continue to go down in the 401k world as more pressure is put on plan administrator to lower costs and increase transparency. Your best bet is to go shopping for a new plan provider. Get quotes from 3 or 4 other providers. In addition to potential lower fees, with a new provider you could lower or eliminate your liability to the plan, and maybe even get managed portfolios for your plan participants (vs. fund picking). A basic rule of thumb with 401ks is that if the funds on your list have the same company name (or a subsidiary of) as your plan provider, you're paying too much.
That is not an uncommon thing to see when it comes to plans of that size. What the plan should do is hire a Registered Investment Advisor (RIA) to serve as the advisor to the plan. An RIA is bound by a fiduciary standard to not have any funds in the plan that are not in the best interest of the participants and their beneficiaries. I would not say that your costs are high without seeing the all in cost structure or know what providers you are using. If your all in costs are in the 1-1.5% that is about average for that size of a plan. If you would like me to help you out further please feel free to reach out to me via email firstname.lastname@example.org or phone (801) 566-3190
1% seems high to me, but without knowing the services being provided, it's not proper to say much more.
Since this is a small group being covered, someone needs to have a serious conversation with the plan trustee. As a part of that conversation the trustee needs to have their responsibility as a fiduciary carefully explained to them. Might be best for someone from outside the company have the talk. One of the points that needs to be reinforced is the trustees responsibility to be able to prove that the fees being charged to the plan for services are competitive with plans of like size and like services. If he/she can do that, fine. But if he/she hasn't got that proof, they are opening themselves up to a potentially huge personal financial liability.
1% of $500,000 is $5000 per year, not an extremely high amount for a Third Party Administrator to charge for all the reporting and recordkeeping required of a 401k. So i wouldn't think it is obscene. You say funds are low cost, which is important - you wouldn't want to add the administrator overhead on top of a mutual fund charging 1.5%. Of course, it never hurts to shop around the services, but ultimately smaller plans will bear more cost burden simply because of covering fixed minimum costs of administration.
Every year www.401ksource.com comes out with a survey on 401k plans. They break down the data by number of employees and assets. On the newest edition it list the AVERAGE plan with 10 employees and $500K in assets pays an all-in expense which includes Investments Expenses, Revenue Sharing, Recordkeeping and trustee services as 1.91%.
I would recommend that if you work with a trusted advisor, that you have them try to negotiate your plan with the current provider to see if any concessions can be made. That would be the simplest way to reduce your price. I would recommend that they shop the plan and you use the lowest quote to put pressure on your existing provider to lower their fees. If that doesn't work consider a change. Lowest fees aren't always the best value.
Each provider does things different for administration and participant services. One thing that caught my attention was that the fee that the record-keeper is charging is a range and not a set percent. Recently Southern CA Edison got sued because one of the investments that was in the fund line-up was getting more revenue sharing than a lower share option that was available. I make that point because most provider are changing their pricing to be a level pricing to avoid any conflicts of interest. The participants in the higher revenue sharing funds pay more for the administration of the plan than the ones with lower fees and that's a liability you don't want.
If you want to talk to someone in addition to your broker, feel free to email me email@example.com.
I don’t have much to add. But I like to emphasize that your employer is only obligated to pay a reasonable fee for the plan. There is no legal requirement to pay the lowest fee. As a participant you may see no value to paying any more then you have to but 401(k) plans are like automobiles. There is a wide range of quality. Just as you can’t buy a low mileage luxury automobile for $10,000 you can’t buy a quality plan for a very low fee.
If the plan provider is providing you with professionally management model portfolios or managed accounts to help you construct a diversified portfolio and willing to take the time to talk to you about your personal situation to guide you in your investment selection and necessary deferral rate then you should expect to pay more. And at the end of the day you should have more money in your retirement account and greater certainty that you are on track to retire on time because of the added effort of the plan providers. Low fees aren’t the ultimate objective. The objective is a high enough account balance to close any gaps between guaranteed income and what you want to spend in retirement.