Finding 401(k) Fees
By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA
401(k) plans are not free. You may never write a check or see transactions for plan payments, but somebody always pays. It may be the employer, it may be the employee, or it may be a combination of the two. Information on 401(k) fees is available from several sources, and the level of detail varies by source.
Types of 401(k) Fee Disclosures
The easiest way to find information on 401(k) fees is by using required disclosures. Starting in 2012, retirement plan service providers (companies that work with 401(k) plans) are required to share information about your plan’s fees. They have to describe the amount you pay in fees as well as what you get in return.
Three of the easiest places to find out about your 401(k) fees are:
- Participant fee disclosures
- Plan-sponsor fee disclosures
- Form 5500
Participant Fee Disclosures
In the past, participants (or people who “participate” and save money in the plan) often thought 401(k) fees were nonexistent. Fees charged to participant accounts were hard to identify, and nobody made an effort to explain the fees. 401(k) plans are already confusing for most people, and fees structures are even more complex.
Now, 401(k) fees must be disclosed in an easy-to-understand format. Participants will clearly see how much they pay, including:
- Administrative expenses
- Transaction charges
- Asset based fees (deducted from investments)
- Other services
Where can you find this information? If you participate in a 401(k) plan, you should receive this information before (or at the same time as) you enroll in the plan and choose your investments. After that, 401(k) fees should be disclosed annually. Ask your employer for this information if you don’t receive it.
What does this tell you? It puts a number on how much you personally pay to participate in the plan. Your retirement account (and therefore your future retirement income) is affected by fees you pay, so it’s important to understand them.
However, this does not tell you where to invest your money. Fees will vary among investment options. The cheapest investments are not necessarily the best ones -- you should choose investments based on your goals, opinions, and risk tolerance. If the fees seem out of line, bring any concerns up with your employer.
Participant 401(k) fee disclosures are outlined in ERISA Section 404(a)(5).
Plan-Sponsor Fee Disclosures
Employers offering 401(k) plans (also known as plan-sponsors) should also get information on their 401(k) plan’s fees. When making decisions about the plan (whether or not to offer one, who to use as a service provider, which investments might be suitable), employers have to take fees into account. They are making an important decision that will affect their employees (and their beneficiaries’) ability to live comfortably.
Plan-sponsors are busy, and they rarely have the time to become experts in 401(k) plans. There are numerous ways that 401(k) fees can be paid, and business needs may make some of those options unattractive -- if the business cannot afford to write checks for plan administration, for example. As a result, it’s understandable that employers don’t really know how much they pay and who gets the money.
Under ERISA Section 408(b)(2), service providers are required to provide additional details describing 401(k) fees to plan sponsors. Note that this information is not distributed to plan participants -- only the individuals responsible for making decisions about the 401(k) plan on everybody else’s behalf (often known as fiduciaries).
Plan sponsors will know how much the plan pays in total, including:
- Everybody who earns more than $1,000 from the plan
- Services provided in return for fees charged
- Whether any conflicts of interest exist
- How costs may be redistributed and shared amongst service providers
Where is this information found? If you’re an employer offering a 401(k) plan (or other ERISA plan) you should receive these disclosures before you enter into an agreement with any service provider. For existing plans, you’ll get an initial disclosure in the first quarter of 2012, and updates when fees change.
Be sure to get disclosures from all of your service providers -- otherwise you may think you’re paying less than you really pay.
What does this tell you? It explains how much the plan is expected to pay (but may not actually pay) to all service providers. With that information, you can compare alternatives, shop the competition, and decide whether or not you can do better. Your duty is to ensure that plan fees are “reasonable,” but, you are not charged with using the lowest cost providers. The Department of Labor (DOL) has made it clear that cheapest is not necessarily best. The most important thing is that your plan is competitive (considering your plan’s characteristics and size, the services and features offered, and your plan’s needs).
Form 5500 Schedule C
Form 5500 is a document that many 401(k) plans are required to file each year. If your plan has more than 100 eligible participants, the filing must include Schedule C showing compensation to service providers earning more than $1,000.
Employers offering 401(k) plans have to sign Form 5500, indicating that they have reviewed the information it contains. This means they’re presumably aware of fees paid to service providers. However, 5500 filings, especially with Schedule C, are notoriously complex and often inaccurate in reporting 401(k) fees. As participant and plan-sponsor disclosures evolve, Schedule C should become more accurate.
Where can you find this information? Schedule C filings are public information. You can view them online for free at the Department of Labor (DOL) website, www.dol.gov, using the EFAST2 search system.What does this tell you? It reports fees actually paid (assuming it’s accurate) in the past. The information is similar to plan-level information in plan-sponsor disclosures. However, Schedule C is much less detailed in explaining who gets paid and for what services.