In the world of retirement planning, one of the most complex topics to convey to a client is the concept of fees and how they are billed to a retirement plan. In theory, the method of charging fees is rather basic. However, each party involved in maintaining a retirement plan may bill the plan in a different manner, and unfortunately, some providers are rather adept at hiding their fees so that the plan sponsor and/or plan participants are unaware that these fees even exist.
So, if the vast majority of the population isn’t well versed in the intricacies of retirement plan fees, how is one supposed to hold their own against a multi-billion dollar industry whose incentives can be in direct conflict with your own?
I can’t tell you how many times I’ve asked plan sponsors or participants how much their retirement plan is costing them only to hear, “oh, we don’t pay anything for our plan” or “we only pay $850/year to our TPA.” What these people don’t realize is that 90% of the iceberg is under the water.
Additionally, as a plan sponsor with fiducial responsibility, you should know and understand the difference between hard-dollar and soft-dollar fees. Hard-dollar fees are the billable invoices a plan sponsors sees and pays on behalf of the organization, whereas soft-dollar fees are those charged from the assets of the plan from the participants’ accounts. These are the fees that can be a total surprise to plan sponsors and the individual participants when uncovered. Some of the most typical soft-dollar fees billed to most plans include:
- Recordkeeping Fees: This is cost to the plan participants for the Recordkeeper to process loans and distributions, prepare and distribute fee disclosures, track the investments for each participant, provide participant support, sponsor the website, etc.
- Investment Fees: Also known as the Expense Ratio, this is the fee the management company charges the participants before giving them their return. As a plan sponsor and participant, you should know that most mutual funds come in several different share classes with the only difference between these funds being the Expense Ratios. Therefore, you want to access the share class with the lowest Expense Ratio possible for your plan.
- Broker/Advisory Fees: The broker/advisor has two main obligations to the plan: to support the plan sponsor by guiding them in designing the plan’s fund line-up and to guide the participants on their individual fund selections from this line-up. For this service, the advisor charges a fee whereas the broker receives a commission.
- Third-Party Administration: TPA fees are billed for the general administration of the plan including Form 5500 preparation & other necessary tax filings, compliance testing, generation and ongoing maintenance of the plan document, etc.
- Other Fees: Other fees associated with retirement plans can include participant fees, asset-based fees, custodial fees, termination fees, and back-end fees.
As you can see, there are a number of parties who all need to get paid and it can be a shocking revelation to learn what you are truly paying for what you initially believed to be an inexpensive or free benefit.
The good news is that most plans have room for improvement within their fee structure. To determine how your plan ranks for fees among other retirement programs of your size, I always recommend requesting a benchmarking report. This report will show you which of the fees listed above are in the acceptable range and which are outside of the industry standards. Sentinel Benefits & Financial Group will run this report for you, review the results, and make specific recommendations to enhance the plan at no additional cost to the plan sponsor or the participants.
In the world of retirement planning, there is a saying: “Little and often makes a lot.” Unfortunately, this is also true for the charges being applied to your account. The changes you make today on the retirement plan can have a dramatic effect on your total balance several years down the road. I suggest investing a few hours into reviewing your plan’s fee structure. Your 70 year-old self will thank you for it!
As always, please let us know if you have any questions.