More than half of all U.S. workers participate in some form of retirement savings plan provided by their employers. For many of us, a 401(k) plan or other deferred contribution plan represents the most significant investment we’ll ever make, the nest egg we’ll be relying on for needed income in years to come. Yet most Americans have no idea what fees are being charged by the companies that manage their plans or how those fees can stunt the growth of their investment over time.
That’s unfortunate. Because retirement savings in defined contribution plans grow and compound over time, excessive fees can dramatically reduce the amount available when the participant is ready to retire. Even seemingly small differences in the annual fees involved can add up to hundreds of thousands of dollars. For example, suppose you put $10,000 a year into your 401(k) for thirty years, averaging a seven percent annual return. A USA Today analysis shows that the difference between one plan that charges .5% in annual expenses and one that charges 2% would be about $220,000; the investor in the higher-priced fund would have that much less to spend in retirement.
What Types of Plan Fees Should I Look For?
There are two general types of costs associated with 401(k) plans. First are the fees the investment managers charge to manage the funds offered by the plan. The fund investment costs can be found in the plan’s annual disclosure of investment options or in the fund prospectus.
The second types of costs are the fees charged to administer the plan, which are generally known as recordkeeping and administrative fees. These fees pay for maintaining plan records, tracking participant account balances and investment elections, transaction processing, call center support, participant communications, and trust and custody services. These are generally provided by third-parties, often insurance or financial services companies. Some recordkeeping and administrative fees are necessary for the plan to operate.
What Is My Plan Costing Me?
Recordkeeping and Administrative Fees
To find out what you are paying for recordkeeping and administrative fees, you should review your quarterly plan statement, annual plan disclosure, or summary plan description for information regarding plan fees and how they are paid. If your plan is charging you directly for those fees, your annual plan disclosure should also have a section that discloses any fees deducted directly from your account.
However, if you do not see a deduction for recordkeeping and administrative fees on your quarterly statement, you may still be paying fees. Many plans pay recordkeeping and administrative fees through revenue sharing. Revenue sharing is where a mutual fund pays a percentage of its management fees to the plan recordkeeper. These fees are generally identified in the mutual fund disclosures as 12b-1 or sub-transfer agency fees. Unlike fees paid directly by participants, which tend to be a fixed amount per participant per year, fees paid by revenue sharing are based on the total assets invested in the plan or in an individual mutual fund, which means the fees increase or decrease as plan assets increase or decrease. Plans are not required to disclose the actual amount of the fees paid through revenue sharing, so it can be difficult to determine the actual amount of the fees being charged. Because revenue sharing is based on a percentage of the assets invested through the plan, plan participants with higher account balances tend to pay more in recordkeeping and administrative fees than participants with lower balances for the exactly the same services.
Regardless of whether plan recordkeeping and administrative fees are paid directly or through revenue sharing, the plan fiduciaries must ensure that the amount of fees paid to those service providers is reasonable. However, too often plan fiduciaries use a plan service provider they are familiar with and fail to test the market to see if the fees being charged are reasonable. Plan fiduciaries who pay those fees through revenue sharing may fail to limit or cap the amount the service provider is permitted to collect. In either case, the plan may end up overpaying for recordkeeping and administrative services, which means you are overpaying and your account balance is being unnecessarily reduced.
Investment Management Fees
Investment management fees are the fees charged by the mutual fund companies to manage their funds. These fees are typically expressed as a percentage of the money invested in the fund on an annual basis. Mutual fund fees are disclosed in the fund fact sheets, the fund prospectus, and the annual plan disclosures.
Mutual fund fees vary based on a number of different factors. Some funds are actively managed and seek to outperform a benchmark while some are passively managed or “index” funds that seek to match the performance of a particular investment index. Typically, actively managed funds charge higher fees than passively managed funds. Plans generally offer a mix of actively and passively managed funds to participants.
As with recordkeeping and administrative fees, plan fiduciaries have an obligation to make sure plan investment management fees are reasonable. Often a mutual fund sponsor will offer different share classes of the same fund to different retirement plans, with markedly different operating costs. Larger plans with more participants and higher asset balances should be able to negotiate for the lowest cost share class on behalf of the plan participants.
What Can I Do?
The U.S. Department of Labor is charged with overseeing benefit disputes and issues involving possible mismanagement of 401(k) plans, but enforcement actions are rare. Typically, it’s up to individual employees to educate themselves about their plans.
If your quarterly statements and the plan disclosure documents don’t give you a clear picture of the recordkeeping and administrative fees involved, contact your employer’s plan administrator and see if you can get answers there. You can review the mutual fund prospectuses to see if the same fund offers a lower priced share class. You can also seek out online resources, such as BrightScope and The Balance, that provide tools for comparing 401(k) plans and assessing your plan.
If you suspect that your plan has been mismanaged or depleted by unreasonable and excessive fees, you should speak to a professional 401(k) attorney about the options available to you.
Talk to the 401(k) Lawyers at FDAZAR
The 401(k) attorneys at Franklin D. Azar & Associates are currently investigating several large retirement plans for mismanagement, as well as smaller plans that may have been subject to excessive fees. We have been helping clients recover money lost by mismanagement activities for years. Our dedicated team of class action and 401(k) lawyers has the experience and resources to fight for your rights, so you can achieve the retirement you deserve. If you have concerns that your 401(k) or 403(b) plan has been impacted by possible mismanagement or excessive fees, give us a call. We will walk you through the details of your plan and provide you with a free, no-obligation evaluation of your options. Contact us here or at 720-372-2824 today.