401(k) Fees: How do you know they're reasonable?

Roughly 52 million American workers have more than $4 trillion saved in over half a million 401(k) plans (1). That’s a lot of plans, holding a lot of money, all relying on some level of specialized services with associated fees to keep them running smoothly. From consulting and advising, to recordkeeping and administration, these fees ensure that a business is compliant, investments are appropriate, and participants are educated, engaged and given the right tools to work toward their own future financial readiness.

Assessing what’s reasonable

A 401(k) retirement savings plan is a cost-effective way to offer flexibility to both the employer and the employee. Because 401(k) plans can differ, so will their fees. So, what is “reasonable” quickly becomes subjective, and really depends on the types of services your plan provides. A plan that offers employer contribution matches or profit sharing may cost more to administer and therefore have more fees. Other plans may be more bare-bones – no frills attached, and come with less fees. Remember, you get what you pay for. It’s not always a prudent idea to go with the plan that is cheapest. Look at plans that align with company values and culture.

Where to find fee allocation

First and foremost, the plan sponsor or an investment committee should have a good understanding of the fees associated with the retirement account. It will be their responsibility to ensure that participants receive education.  Both plan-level and investment-related information, including fees, will be provided before a participant’s initial investment, and then annually after that.

A 408(b)(2) form is a great resource for plan sponsors to see where fees have been charged each year. This document makes it easier for plan fiduciaries to assess the “reasonableness” of the fees paid. To alleviate doubt, review the plan and associated fees regularly.  You’ll want to benchmark the fees and add a healthy dose of common sense. If your gut tells you something is too expensive, it often is. You may need to do a little more research. Industry experts suggest a more in-depth review every three years.   

To keep the plan participants up to date, the law requires that a 404(a)(5), a record of fees such as the cost of investments, administration and recordkeeping is provided annually. Plans should be reviewed annually to make sure all participants are on track to meet their 401(k) retirement savings goals.

Look for a plan or service provider that advocates a policy of transparency

Fees are an expected part of a 401(k) plan but excessive fees can also be the reason why people look for different plans.  Plan sponsors should align themselves with 401(k) service providers or third party administrators that endorse “full disclosure.” All Fees will be clearly identified up front for both the plan sponsor and the participants. Don’t be afraid to ask questions. It important to stay educated on what the fees mean and what they pay for.

CoPilot, powered by PAi, has a policy of “full disclosure” of all fees. You'll be matched with investments that fit your needs. Your investments will be monitored for performance, and you'll receive real-time messaging whenever an event occurs that will impact the health of your retirement. And you'll always have a clear picture of how much retirement you're actually buying because CoPilot translates your savings into what matters most - how many years you can afford to be retired. Learn how CoPilot is changing the retirement conversation.

    (1) Resource: 401kspecialistmag.com. A Simple Solution to the 401k Free Lawsuit Frenzy. November 30, 2016. "Roughly 52 million American workers have more than $4 trillion saved in over half a million 401(k) plans.