Understanding 401(k) Fees and Expenses to maximize Your Staff’s Plan
Implementing a 401(k) plan is a smart move for countless reasons -- offering your employees a 401(k) plan shows them that you care about their futures, helps retain employees who might be tempted to go to another company offering a retirement plan, and provides another incentive for new employees to come work for you.
It is the Employers Responsibility to Select the Best Plan for Their Staff
When choosing a 401(k) plan, select one that not only benefits your employees, but that also works for you. There are many different factors to consider, one being the fees and expenses that are involved with the plan you choose. Many of these fees and expenses will be your responsibility, although some fees are the responsibility of your employees (but which you can offer to cover on their behalf if you wish to do so). The following are six things that you should know about a 401(K) plan's potential fees and expenses.
First, 401(K) Fees Depend Upon
401(k) plan fees vary greatly from plan to plan based on the type of investments you choose as well as the benefits provided in your plan. Not only do the fees vary from one mutual fund to another, but there are numerous other options that factor into the fees of any given mutual fund as well.
Which Custom Options You’ve Chosen
There are many different types of funds to choose from, including stock-based funds (often referred to as "equity" funds), and fixed-income (also referred to as "bond" funds). Stock-based funds have the most growth potential but also present the highest risk due to their volatility. Fixed-income funds pose a lower risk and provide a more consistent income.
Whether Your Plan is Actively Managed
401(k) plans can be managed in two ways--actively or passively. Active management involves continuous research into different companies and market conditions by fund managers, who then buy and sell shares on a daily basis. Passive management is a more long-term approach, which means that fund managers purchase shares with less regard to the daily fluctuations of the market. The objective of an actively managed fund is to beat the market's returns, while the objective of a passively managed fund is to be the market's returns.
Active management requires much more attention to the market, which means fund managers will be managing your investments on a daily basis. This requires a lot more work, sending fees higher for actively managed 401(k) plans. Management fees for actively managed funds can cost around 0.82 percent.
Daily attention isn't required for passively managed plans since fund managers are investing on your behalf into stocks with long-term potential, so management fees will be less on passively managed plans. Management fees for passively managed funds are often low, at around 0.09 percent.
The 401(k) Maintenance and Set Up Fees
Based on how much set up is involved and the number of employees you have, you'll have to pay set up fees as well as regular maintenance fees.
Set Up Fees
Set up fees vary based on the 401(k) plan you choose and how complicated it is to set up. For example, the more benefit options you provide to your employees and the more employees you have, the more complicated the set up will be. It will be even more complicated if you are transitioning from a previous retirement plan to a new plan, requiring the transfer of assets. Generally speaking, set up fees range anywhere from $500 to $3,000. If you're rolling over assets from another plan, it can cost an additional $800 to $1,500 on top of basic set up fees.
Monthly or Annual Fees
A monthly or quarterly fee will be charged for every participant of your plan. Additionally, there are annual fees that you will be responsible for as well, such as discrimination testing, which typically costs between $800 and $2,500 a year.
Many administrative tasks need to be done to maintain your 401(k) plan. For example, a financial institution, such as a bank, must oversee various accounting, record-keeping, trustee, and legal tasks. These fees will also cover the filing of form 5500.
The majority of 401(k) plans will require you to file a form 5500 on a yearly basis. The form discloses certain information about your specific plan to the federal government as well as the participants of your plan. This form must be filed in accordance with ERISA (Employee Retirement Income Security Act of 1974). There are three different versions (Form 5500-EZ, Form 5500-SF, and Form 5500). The version you have to complete is based on how many of your employees are participating in the plan.
The investment fees of any given 401(k) plan are likely to account for the biggest percentage of your plan's total fees and expenses. Investment fees cover the cost of all investment-related services, including investment management. They are charged by the investment funds that you choose and are more commonly referred to as "expense ratios."
Investment fees are expressed as a percentage of the plan's assets. Yearly investment fees for the average 401(k) plan amount to roughly one percent of the plan's assets. Investment fees are usually higher for actively managed funds than they are for passively managed funds. Larger scale plans typically have lower investment fees, while smaller plans (used by smaller businesses) usually charge higher percentage fees.
Where to Find The Fees and Charges
In order to calculate how much your fees and charges are, you will need to know where to find them. Unfortunately, this is often easier said than done. Providers often make it difficult to figure out and they certainly don't send you an itemized bill that breaks down your costs and tells you exactly what you're paying for. The following are the documents you will need to look over to determine the fees and charges of your plan:
The 401(k) Plan’s Summary Annual Report
The Summary Annual Report (SAR) is a single-page summary of form 5500. It consists of the plan's finances. Providers are required to send out the SAR every year by ERISA (Employee Retirement Income Security Act of 1974). The SAR informs participants of your plan of all of the plan's details. The administrator of the plan is required to distribute it (participants must be given a copy at any time upon request as well). The SAR includes basic financial information about the plan, the administrative expenses of the plan, the value of its assets, employer and employee contribution amounts, and funding standards and compliance.
Prospectus for the Funds of the Account
A fund prospectus is a legally binding contract between the fund and the holder of the fund. It details the objectives and strategies regarding the investment of certain funds or groups of funds. It also includes information about the past performance, managers, and financial information of the funds.
The 404a-5 Disclosure regulation not only requires plan administrators to disclose specific information to 401(k) plan participants, but also requires record keepers and investment managers (and other plan service providers) to disclose certain plan-related information (such as fees) and investment-related information (such as changes in investment performance) to sponsors of the plan.
A Final Note on Fees and Expenses
It's important to understand what kinds of fees and expenses you and your employees may be required to pay when choosing a 401(k) plan. When looking at different 401(k) plans, make sure that the provider gives you a fee schedule or quote that outlines all of the fees that they may charge you. Not only will this make it easier to compare fees and expenses as well as determine how much those fees and expenses will cost, but it will help prevent surprise fees from showing up once the plan goes into effect.
Make Sure You Ask About Any Other Hidden Fees
Some providers charge "hidden" fees that can add to the expense of a 401(k) plan. For example, although most providers charge you based on the number of participants in your plan, some will charge you based on how many employees you have (despite the fact that some of your employees may choose not to participate in the plan).
However, a mandate was passed by the U.S. Department of Labor back in 2012 that requires all providers to disclose all of its fees in a prospectus statement every year. Read this statement thoroughly to ensure that you don't miss these hidden costs.