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401(k) Plan Recordkeeping

By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA

401(k) recordkeepers track assets in retirement plans. They may do other things as well, but a recordkeeper's main function is to track how much you have, where it is, and what type of money it is. Recordkeeping fees may be paid by employers, employees, or both.

The Need for 401(k) Recordkeeping

401(k) plans are different from accounts you might own as an individual. When you open an account on your own, the assets are tied to your name -- you own the assets. With a retirement plan, your assets may be pooled with those of your co-workers, or with thousands of other investors. Technically the 401(k) plan owns the assets, but the funds must be used for your benefit.

Recordkeepers keep track of your money. They know how much you've invested, what you've earned on investments, and so on. Investment managers don't know who you are; they just manage a large pool of money. Recordkeepers can help divvy up the money if needed.

You may have different types of money in your retirement plan. Your own contributions are one type of money (salary deferral) while your employer's matching contributions are another (employer matching). Some common money types in 401(k) plans include:

  • Salary deferral (pre-tax and/or post-tax)
  • Employer matching
  • Employer profit sharing
  • Qualified nonelective contributions
  • Rollover contributions

All of those money types are treated differently so it's important to account for them in separate buckets. For example, employer contributions may be treated differently from your rollover contributions if you leave your job -- you get to take 100% of your rollover money but you can only take all of your employer matching money if you're 100% vested. Recordkeepers track which dollars are which.

Other Recordkeeping Services

In addition to tracking individuals' assets, recordkeepers often provide other services. It's not uncommon for recordkeeping fees to include:

  • Maintaining a website to check 401(k) balances and make transfers
  • Printing and mailing account statements to employees
  • Requesting trades and other transactions within participant accounts
  • Providing retirement calculators and guidance
  • Producing enrollment and education materials
  • Maintaining toll-free customer service lines for plan participants

Those services cost money, and higher calibers of service generally lead to higher fees. In addition to the services that employers and their employees see, a lot happens behind the scenes at any recordkeeper. They generally:

  • Conduct research and development to improve service and stay competitive
  • Review operations to ensure compliance with various laws
  • Update processes as regulations change
  • Market to attract new clients

How 401(k) Recordkeepers Get Paid

Recordkeepers charge a fee to cover their costs. Employers may agree to pay for recordkeeping, or they may decide to pass the costs on to employees. When employers choose to pay for recordkeeping, it is generally because they:

  • Want to keep investment costs inside the plan as low as possible for employees (including a business owner/employee)
  • May qualify for a tax benefit if paying for the retirement plan is a deductible expense

When employers pay for recordkeeping, they typically write a check annually or quarterly.

When employees pay for recordkeeping, 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. Some recordkeepers show their payment transparently as a line-item, while others get paid directly or indirectly as a result of investment expenses (out of a mutual fund's expense ratio, for example).

Who is Your 401(k)'s Recordkeeper?

You may not know who your plan's recordkeeper is, and as a plan participant you may not need to know. Recordkeepers rarely identify themselves, although employers should know who's who. In many cases, your recordkeeper is the company that prints your quarterly 401(k) statements or offers online access to your 401(k) account.

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Justin Pritchard is not affiliated or registered with Cetera Advisor Networks LLC. Any information provided by Justin Pritchard is no way related to Cetera Advisor Networks LLC or its registered representatives.