401(k) Plan Administration Basics
By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA
401(k) plan administrators make sure that retirement plans follow the rules and help everybody save for retirement. They work with legal documents, perform analyses and tests, and monitor plan operations. 401(k) plan administration fees may be paid by employers, participants, or some combination of both.
The Need for 401(k) Plan Administration
401(k) plans can be a powerful way to save for retirement and save on taxes. However, there are strings attached -- a variety of laws limit the ways in which you can use a 401(k) plan. These laws are complex, they change regularly, and they require that somebody continually pays attention to the 401(k) plan to keep everybody out of trouble and protect plan participants.
401(k) plan administrators ensure that the plan works the way it’s supposed to, and that it follows the rules. Every retirement plan is different. 401(k) plans have to follow certain laws, but they can be customized (to a degree) to meet the needs of any employer. 401(k) plan administrators perform that customization while respecting applicable laws. Then, they review the plan on an ongoing basis to ensure that it has been operating as designed and continues to meet the needs of the employer.
Common Plan Administration Services
Administration is an ongoing process. After choosing a plan design and launching it, 401(k) plan administrators update the plan and monitor every transaction. They sometimes act as a gatekeeper -- certain transactions (such as distributions) cannot happen without authorization from a 401(k) plan administrator.
Typical 401(k) plan administration services include:
- Plan design - consulting on how the plan should be structured, if the employer should use a match, safe-harbor option, etc
- Updating the plan - when regulations or employer needs change, the plan’s rules need to change
- Monitoring operations - a 401(k) plan must follow its own rules or there may be tax consequences and legal issues
- Authorizing transactions - loans, distributions, and other transactions are evaluated against the plan’s rules and authorized by an administrator
- Performing tests - under law, retirement plans cannot benefit select employees at the expense of other employees (discrimination tests, ADP, ACP, etc)
- Preparing filings and disclosures - retirement plans must provide information to regulators as well as plan participants periodically (Form 5500, SPD, Safe-Harbor Notice)
- Fixing problems - if things don’t work out as anticipated, employers must be notified of problems and potential solutions
- Consulting - helping employers navigate through unusual events such as company mergers and bankruptcies
How 401(k) Plan Administrators Get Paid
401(k) plan administrators generally charge a flat annual fee plus a per-head fee. For example, administration may cost $2,000 per year plus $15 per participant. Additional services (processing distributions or loan administration, for example) create extra charges, usually billed as a flat fee.
Employers can pay for 401(k) plan administration, or they can pass the cost on to employees. When employers choose to pay for administration, it is generally because they:
- Want to keep investment costs inside the plan as low as possible for employees (including when the business owner participates in the plan, has a relatively large balance, and his/her account would pay for the bulk of plan expenses)
- May qualify for a tax benefit if paying for the retirement plan is a deductible expense
When employers pay for administration, they typically write a check annually or quarterly.
When employees pay for administration, the fee may be paid as either a flat fee or an asset based fee. With flat fees, employees see a fee deducted from their account periodically (monthly or quarterly, for example). The dollar amount generally does not change, so it’s a predictable, recurring cost.
Asset based fees come out of employee investments, and they may or may not be visible to employees as transactions in their accounts. Administration fees may be shown transparently as a line-item, or they may be baked into investment expenses (as part of a mutual fund’s expense ratio, for example).
Some employers believe they get 401(k) plan administration services for free. They do not see any fees, but administration is never free. When it’s not easy to see who’s paying for administration and how much it costs, administration is being paid for out of plan assets. Regulatory changes requiring more transparent fee disclosure make it easier for everybody to understand how much they pay.
Who is Your 401(k) Plan’s Administrator?
Plan administrators often work behind the scenes. Employers probably know who the 401(k) administrator is, but most employees do not have any contact with an administrator. 401(k) plan administration may be handled by a group that does nothing but administration (a Third Party Administrator or TPA), or it may be performed by a recordkeeper as part of a bundled 401(k) plan.
Dedicated third party administrators offer the most flexibility to employers who want to get fancy with plan design. Bundled providers can perform administration, but customization is generally more expensive or not available.