As a plan sponsor, it’s your fiduciary responsibility to make informed decisions about your retirement plan. And part of those decisions includes finding retirement plans that fit your budget and that are in the best interest of your employees.
In other words, know the fees your retirement plan provider charges.
Unfortunately, many retirement plan providers make it extremely difficult to identify exactly how much you’re paying and what you’re paying for (often referred to as hidden retirement plan fees).
And while the U.S. Department of Labor requires retirement plan providers to disclose all fees, many plan costs are still difficult to find if you don’t know what you’re looking for and how to ask the right questions.
In this article, we’ll go over what you should look for when pricing out retirement plans and how to be aware of plan providers who may be hiding extra fees.
Why do retirement plans have fees?
First, let’s start high level. Why must you pay fees for retirement plans?
Just like any service, fees are necessary. They ensure the plan operates efficiently and are generally allocated across several areas like operation, management, and support.
So yes, fees are part of a well-functioning retirement plan. However, it is critical to know what fees you’re being charged.
Why? Because many plan providers have high retirement plan fees and are charging far beyond what is necessary to operate a plan. As a plan sponsor, you want to make sure you find a retirement plan that fits your needs and matches your budget. Plus, it’s important to find a plan provider who is honest about all fee transactions.
Think about it this way: every dollar you’re overspending on fees could be invested or directed toward support of your staff. That’s why it’s important to understand how fees work, what your retirement plan fees are going towards, and if you’re spending too much.
What does the average retirement plan cost?
The average cost of a retirement plan can vary based on a variety of factors, such as size of plan, specific fund fees, and the level of service that is chosen to manage these funds. At times, pay commissions or rebates may also be included.
Most plans include a one-time fee to establish your plan, and ongoing charges for administrative services and investments. But with complex fee structures and a variety of plan options, it’s difficult to determine a set fee for all retirement plans. Your fees will vary depending on how your plan is set up.
Let’s take a deeper look into some common retirement plan expenses.
Retirement Plan Start-Up Fees
One-Time Fees
You can expect one-time fees for start-up services, such as setting up the plan, creating plan documents and making amendments, converting providers, terminating the previous plan, and other services. How a plan chooses to charge one-time fees will vary. Some may charge a flat fee; others may charge a percentage of assets.
Ongoing Fees
In addition to one-time fees, retirement plan providers charge ongoing fees as well. These fees will be based on recurring costs associated with the management of a retirement plan. They can vary depending on the type of plan, investment options, and service providers involved.
Ongoing fees may be charged in a few different ways:
Asset based: The amount of assets in your plan determines how much you’ll be paying. This expense will be represented as a percentage or a basis point. Depending on the plan, advisory fees may be directly tied to the growth of the assets.
Participant based: Your costs are determined by the number of participants in your plan. At times, it may be a fixed amount (no matter the size of assets) or a percentage of a participant’s assets (which means the more they save, the more they pay in actual dollars).
Transaction based: Fees are determined by retirement-related services or transactions. This could include disbursements, loan set up, and more.
Flat rate: This is a fixed cost, no matter what type of plan you have. This may be a variation of asset-based fees, but it is set no matter the size of assets.
Some common ongoing fees include:
Administrative fees
These expenses, or fees, cover the costs of the daily operations it takes to maintain the plan. These fees include anything from annual plan fee, recordkeeping, customer service support, reporting, and compliance testing. These fees could be charged based on a flat rate or a percentage of assets.
Keep in mind that some administrative fees are covered by expense or cost ratios of a mutual fund and are deducted from the investment returns. If so, it is very hard to determine how much you pay. We’ll talk more about fund expense ratios below.
Custodial fees
These fees are paid to institutions that hold and safeguard assets within the plan. Custodians ensure the investments are secure, execute transactions, and maintain accurate records of all plan assets. Sometimes these fees are included in other fees.
Individual service fees
In addition to administrative fees, providers will often charge individual service fees associated with one-off services like processing loans or distributing funds. These fees are charged directly to the participant and cover the extra services that said participant chose to partake in.
Commissions/12-b1/Sub-ta payments
Often your Advisor may recommend certain funds because of the commissions or other rebates they receive. These funds may have higher expense ratios inside the mutual funds, which, at the end of the day, are paid by the employee. Make sure you ask your advisor if they are receiving any of these payments. This should be transparent, but often it’s simply another way to drive profits for the advisor or plan provider.
Fund Expense Ratios
Investment fees are generally paid by the participants. Unfortunately, many participants are unaware of these fees with 73% of Americans saying they have no idea what their investment fees cost. These fees make sure the investments are managed well. But it’s important to understand what you’re paying so that you can gain value from your investments instead of paying high fees that cut into your returns.
Some common investment fees are management, distribution, and service fees. These fees show up as cost or expense ratios and are charged as a percentage of your total account balance. Think of it this way: it’s the fee you pay to the fund company for managing the fund.
The average expense ratio of a retirement plan ranges anywhere from 0.2% to 5% and will vary depending on the amount of money in the plan, the number of participants, and the specific plan provider. So, if a fund has an expense ratio of 0.30%, then $3.00 would be paid annually for every $1,000 invested.
If you feel like you’re paying too much for individual funds in your retirement plan, take a look at your fund options and choose a similar one with a lower expense ratio.
Some financial advisor services are also tacked onto this fee. They are deducted directly from your investment returns and can be easy to miss.
How do you know if you’re paying too much in retirement plan fees?
Begin by looking over your retirement plan’s Summary Plan Description. This guide details how your plan operates and may give you an overview of your fees and expenses for you and your participants.
If you have an ERISA retirement plan, you can request that your plan provider fills out a Plan Fee Disclosure Form. This is a helpful tool provided by the Department of Labor that includes a list of all possible plan costs.
Then, shop around a bit. Compare the fees and services they offer to find the most cost-effective options that fit your specific organization’s needs. It’s critical that you know the details about your retirement plan in order to evaluate your plan fees and benchmark them against other retirement plan provider fees.
When reviewing your organization’s retirement plan (or looking around for a new one), start by asking these questions:
- What investment options does your plan provide?
- What fees are associated with these investment options?
- What other investment services are available under your plan?
- Are administrative fees paid separately from your investment management fees, and if so, are they paid by the plan provider or the employer?
- What other fees do your plan investments charge?
- Will the advisor personally visit and interact with your employees?
Most importantly, make sure the plan provider is transparent about their fees. If something is unclear, ask for more information.
Are 403b plans more expensive than modern 401k plans?
403b and 403b9 plans provide a big benefit for churches, pastors, and non-profit organizations. Unfortunately, they’ve also gotten a bad rap for being more expensive.
However, while some 403b plan fees can be high, many are not and offer comparable fees to 401k plans. If you’re a school, university, church, camp, rescue mission, hospital, or a 501(c)(3) charitable organization, a 403b or 403b9 plan can be a big benefit.
Before deciding on a 403b plan provider, compare them to other 403b plans and review fee structures, value of service provided, and company transparency.
Do your homework
Bottom line–do your homework. All retirement plans cost money, but if you’re not educated on the specific fees within your retirement plan, you may be paying too much.
Look at the overall value of your plan. Is your retirement plan provider upfront with their fees and services? And are they putting the needs of your participants first?
To sum it up, plan providers who genuinely care about you and your employees will not be nickel-and-diming you at every move. Find the plan providers that care!
How we handle fees at TruthPoint Financial
At TruthPoint Financial, we saw a problem surrounding fees and retirement plan services. Most large retirement plan providers don’t have high fees, but they aren’t personal and don’t understand the unique needs of non-profits and faith-based organizations.
And the smaller retirement plan providers that do provide services for those unique needs charge way too much.
At TruthPoint Financial, we saw a need for a retirement plan that cares about your staff and provides low fees. That’s why we made it our mission to serve faith-based and non-profit organizations by providing unique, cost-effective plans.
We pride ourselves on providing retirement plans that are built on truth, transparency, and trust. That means we disclose all retirement plan fees, and we make decisions that we truly believe will benefit our plan sponsors and their participants.
Interested in learning more? Schedule a call today.