The Right Way to Significantly Lower 401(k) Fees

For years, providers of 401(k) plans have charged the plans they manage fees based on assets. They love to do that because it causes their fees to grow automatically. As long as participants continue to contribute out of each paycheck, as long as companies put in matching contributions and/or profit-sharing contributions, as long as stocks and bonds continue to increase in value, the fees continue their ascent.

Unfortunately, that is still the case today in the vast majority of plans. When I as a consultant and investment manager for retirement plans am asked to take a look at a plan, in nearly all cases I find that asset-based fees are still being used, at least for plans under $50 million in assets.

Because the retirement plan often gets little attention from business owners and executives, they don’t realize that their fees are going ever upward as the services they receive stay unchanged at a low level. High and increasing fees, consistently low service – what could be wrong with this picture?

This puts them as fiduciaries in a really bad spot, setting them up for a Dept. of Labor (DOL) civil action or a lawsuit by one of the attorneys that have recently taken to suing fiduciaries of retirement plans. ERISA and other retirement plan laws and regulation have a strict prohibition against paying fees to providers if the fees are not necessary or not “reasonable for the services performed.”

When services stay the same but fees automatically increase at the rate of the plan growth, often 10-15% a year, there is no way a fiduciary can keep justifying the fees he is paying the provider out of plan assets as “reasonable for services performed.”

Will his investment advisor alert him to this? Are you kidding? It’s a gravy train for him.

That is, until I come along and educate the fiduciary as to the situation and the risk the advisor has put him, not to mention all the money his participants are not seeing in their accounts, him most of all because he normally has a large account balance and is likely paying a large portion of the ever-rising fee. In the traditional approach, the bigger your piece of the 401(k) the more of the plan fees you are paying out of your account. If you as a business owner or CEO have the majority of the plan balance, your single account is being the majority of the fee that is likely to be tens of thousands of dollars.

I will then help the fiduciary choose from among a list of highly qualified record-keepers and third party administrators (TPA) who charge a flat fee for services. I will charge my fee as investment advisor as a flat fee, an hourly or even an asset-based fee if it is revisited each year to keep it in the proper range for services performed.

I also often recommend that companies pay for plan expenses out of company funds and then have the revenue sharing from plan investments paid to the company. With the lower fees I arrange for them the revenue sharing will often cover most and sometimes all of the expense. This frees them from the liability issue of paying for services out of plan assets and keeps all participant accounts growing without the sometimes crippling fees.

There is a great deal more to say on this. If you would like more information, ring me up.