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The true costs: Understanding retirement plan fees

Dec 07, 2021

This article was written by Blake Faust, Retirement Plan Services Leader at Wipfli Financial Advisors, LLC.

Understanding the true costs of your retirement plan can be challenging.

Often, you’re working with multiple providers — from your recordkeeper and investment advisor to third-party administrators and fund managers — all of whom are charging for their services. To make matters more complicated, there is no standard way for charging fees across the industry, so knowing exactly what you’re paying is no simple task.

As a plan sponsor, it’s critical to understand the costs your plan is being charged. As a fiduciary you must always act with the best interests of participants in mind. This means determining whether costs are reasonable for the services being provided or whether you should renegotiate or potentially make changes.

What are typical retirement plan fees?

To understand your retirement plan fees, let’s first dive into the common providers servicing plans:

Recordkeeper/administrator: Retirement plans require you to have a recordkeeper/plan administrator to process enrollments, track employee balances and generally manage the day-to-day functions of the plan. This can sometimes be one provider (bundled) or multiple (unbundled). The fees your recordkeeper/administrator will charge typically include a base fee plus a per participant fee and may also include a fee based on the assets in the plan.

Custodian: Your custodian is responsible for safeguarding plan assets and executing trades within the plan and, as such, will charge a custodial fee — often based on the amount of assets in the plan.

Investment advisor: Your investment advisor will charge fees to develop and maintain the plan’s investment lineup, perform on-going investment due diligence (often in a fiduciary capacity) and may also provide additional education to sponsors and employees. These fees can take the form of a percentage of assets or a flat dollar amount.

Fund manager: Fund managers charge a fee for investing in their funds. The fee is called an expense ratio and is a percentage of the amount invested in the fund. 

How to find and add up your retirement plan fees

Providers are required by law to annually distribute a fee disclosure that outlines what fees the provider will charge for the upcoming year. Your first step should be to review these documents to understand what fees you’re being charged for the various services being provided.

You want to understand not only the out-of-pocket fees (what you’re writing a check for) but also the not-so-transparent costs, such as fund expenses, fees paid directly out of plan assets, and/or revenue sharing arrangements. These can be overlooked because participants may not see these fees being deducted from their accounts. Too often we hear plan sponsors say “we don’t pay anything for our 401(k)” only to find their plan is full of high-cost mutual funds embedded with additional fees.

Work with your advisor to perform benchmarking at least annually. You want to look at retirement plans that are a similar size to yours and identify the average of cost to know whether you’re in the ballpark or you need to consider making changes.

It’s important to remember that there are no rules requiring you to go with the lowest cost providers. Many factors can go into what is considered “reasonable” for fulfilling your fiduciary duties. For example, getting a higher level of service from a provider can justify paying a higher fee. To protect your organization from possible litigation, you need to make sure you can demonstrate a prudent process is being followed for making decisions within the plan — such as documenting meeting minutes, using benchmarking studies and seeking bids from other providers when necessary.

Other best practices

If you find your plan fees are on the high end compared to your peers for the services you’re receiving, you can use that information to renegotiate with current providers. The more educated you are on how providers charge their fees, the more leverage you have. For example, if an advisor used a certain share class of funds (e.g., R1 or R2) when your plan was just starting out, you can ask if you qualify to move into a lower share class that charges lower fees based on the size of your plan.

If you feel overwhelmed or are not sure what questions to ask,  we recommend seeking third-party assistance. An advisor can analyze your retirement plan to review the reasonableness of fees and also provide insights on your investments, employee education services, plan metrics and more. They can identify possible red flags and make recommendations for improvements that could, overall, lower costs for your employees.

When is the best time to review retirement plan fees?

While there is no right or wrong time to analyze your fees, fee disclosures are typically sent out at the beginning or end of the year. This makes it easier to set up a process where receiving the disclosures triggers your annual review and benchmarking.

Looking to review your retirement plan costs?

Wipfli Financial and our affiliate Wipfli can help. We perform complimentary analyses of retirement plans to identify areas of improvement and give you greater transparency into your plan. We also perform retirement plan fee benchmarking studies so you can understand what costs you’re paying and how they compare to your peers. Contact us to get started.

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Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services.

Wipfli LLP and Wipfli Financial, although affiliated companies, are separate entities.