In the first post we talked about expenses and fees in 401k plans and how important it is – both for employer and participant – to keep them reasonable. And in today’s world anything more the 1.5% in total – is unreasonable. More than 2% is now excessive.
Fees charged for these plans come under particular focus as the Department Of Labor (DOL) aims to create greater transparency through regulatory disclosure under 408 (b)(2) and 404(a) of the employee Erisa act.
Probably the most in-depth research on this topic comes from Deloitte consulting and the ICI (Investment Company Institute) via a report entitled Inside the Structure of Defined Contribution/401(k) Plan Fees: A Study Assessing the Mechanics of the “All-In” Fee.
I love the title of the study, particularly the phrase “All-In” Fee because that is what you should be looking for. In a nut shell, here is what the report reveals:
- Many fee structures and arrangements exist in the defined contribution marketplace.
- Plan size (in terms of number of participants) was found to be a significant driver of a plan’s ‘all-in’ fee. Larger plans tend to have lower ‘all-in’ fees as a percentage of plan assets.
- A correlation also exists between the ‘all-in’ fee and the average account size in the plan. Plans with larger average account balances tend to have lower ‘all-in’ fees as a percentage of plan assets.
There are three general groups of services that define contribution plans typically procure. First, defined contribution plans generally require certain administrative services such as compliance (to make sure the plan is administered properly), legal, audit, Form 5500, and trustee services. Administrative services also include record keeping services, which maintain participants’ accounts and process participants’ transactions, and often also include educational services, materials and communications for participants and plan sponsors. Investment management services are a second category. Investment options are offered through a variety of investment arrangements such as through mutual funds, commingled trusts, separate accounts, and insurance products. In some plans, investment services include the offering of company stock or a self-directed brokerage window as an investment option. A third set of services occurs in some instances when the plan sponsor seeks the professional services of an investment consultant or financial adviser and/or financial advice services for participants.
Totaling all administrative, recordkeeping and investment fees, the median participant-weighted ‘all-in’ fee for plans in the 2011 Survey was 0.78% (Exhibit 2) or approximately $248 per participant. The data suggest that the participant at the 10th percentile was in a plan with an ‘all-in’ fee of 0.28%, while the participant at the 90th percentile was in a plan with an ‘all-in’ fee of 1.38%.
Hopefully, this information can be a starting point for you to benchmark the Fees in your own 401k plan - Are your Fees more or less than the 0.78% median?
In the next and last post we will dig into the Investment Management portion and how to find great low-cost investment choices.
The full report can be found here.