By Craig Ciarlelli, AIFA, ChFC, CLU
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.
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 help 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 help 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 help ensure that it has been operating as designed and continues to help meet the needs of the employer.
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:
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:
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.
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 can 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.