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Benchmarking Your Plan's Fees - Class 307

As we have already discussed in this course, a fiduciary is charged with running the retirement plan in the best interests of the participants first and all other parties second.  Part of your fiduciary responsibility as a plan sponsor is to oversee the providers you have selected to support your 401(k) Plan and make sure they are charging a reasonable fee to do so.  So how do we do this?  Join us for today’s class when we discuss how to benchmark the retirement plan.

The goal of benchmarking a retirement plan is to uncover all of the costs that are being charged to the 401(k) and decide if these fees are reasonable and in-line with industry standards. Sounds easy, right? It’s not always. First, I would recommend obtaining a fee disclosure and/or an annual invoice for each provider servicing your plan. For most 401(k)’s, this can include your third-party administrator, recordkeeper, advisor, and investment managers. In the world of 401(k) Plans, we typically express the total cost of a retirement plan as a percentage of the assets (or the total plan balance). For example, if all of your providers charge a cumulative annual fee of $10,000 per year and your plan has a total balance of $1 million, we would say that your total plan costs would be 1.00% of the assets.

Now, this is where things can get a little tricky. Since your third-party administrator, recordkeeper, advisor, and investment managers are typically from different companies, we may have a little work to do. Likewise, each provider may charge for their services in a slightly different manner. For example, third-party administrators generally charge for their fees as a result of the number of participants in the plan. Conversely, record keepers, advisors, and investment managers tend to charge for their services as a percentage of the plan’s balance (also known as an asset-based fee). Finally, each one of these providers has the ability to charge their fees to the organization, to the participants’ accounts, or a combination of the two. Knowing this, I would highly suggest using the support of a financial advisor to help you benchmark your plan.

Once you’ve collected all of the necessary fee disclosures and you have a feeling for the true costs of your 401(k), you can begin the benchmarking process. It is traditionally considered a best practice to benchmark your plan once a year and put your plan out to bid every three to five years. By doing so, you will have the information necessary to determine whether your plan is within the industry standards for fees. If not, you have the ability to negotiate with your current providers or potentially move your plan to another provider who is more competitive.  Should you decide to put your plan out for bid, we would suggest running an RFP to help benchmark all of your providers.

Please note that if your providers are billing the 401(k) based on the asset size of the plan, you will continue to pay more as the plan grows. Does this mean that if your plan doubles in size over time that you should be paying double the fees? Typically not. Retirement plan pricing is much like any other product when it comes to the size of your order. The more business you give to a particular provider, the lower you can pay per service. This is good news in the 401(k) world since most plans grow each year based on ongoing employee contributions, employer contributions, and potential investment returns. Therefore, if your 401(k) Plan typically grows over time, plan sponsors have the opportunity to leverage these increased assets to negotiate lower rates on behalf of the participants.

By putting your plan out to bid and running a formal RFP process, you can see what other providers would charge for your plan in comparison to your current rate. Likewise, you can also determine what other features and services are being offered in the marketplace that your 401(k) doesn't currently offer. Although this may seem like a daunting process, your financial advisor should have the resources necessary to run a plan benchmark and the RFP process on your behalf.

Just like any other employee benefit, the 401(k) industry is highly competitive and, therefore, offers a tremendous amount of tools to help support you on this portion of your fiduciary responsibility toward the plan. Join us for next week's class when we discuss the ERISA File and how you can demonstrate your fiduciary process by storing the proper documents and reports for any external audits.

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