Are Your 401(k) Plan Administrative Fees Allocated Equally?
Generally, some 401(k) plan participants shouldn’t bear a higher proportion of a qualified retirement plan’s administrative costs than other participants because of their investment choices. Yet that’s the reality for many participants — and the numbers can be significant.
What’s the problem?
Generally, most plans defray administrative costs through expense reimbursement from the plan’s investment options. In many situations, the majority of plan costs are paid for by a minority of workers because of the wide range of payments provided by different asset managers and share classes, according to national consulting firm Aon Hewitt.
“Even participants with the same account balances are often paying significantly different amounts for plan administration,” Aon Hewitt stated in a recent report. Plan sponsors should examine whether this is occurring within their own plans. Allowing what’s essentially a discriminatory practice to occur could be construed as a fiduciary breach. And it’s unfair to those participants who are paying a disproportionate share of plan administrative expenses.
What to do about it
According to Aon Hewitt’s research, plan sponsors declare a strong interest in 401(k) fees. However, only 21% have recently restructured their plan’s administrative fees so they’re assessed more equitably.
Aon Hewitt identifies these 21% as “best in class” employers. These employers are designing their plan’s fee models so that employees pay the same amount in fees regardless of how they allocate their portfolio.
The firm offers the following advice to employers to equitably allocating fees:
Analyze fees. Start by reviewing how your plan distributes administrative fees among your participant population. If disparities exist, be prepared to explain why.
Choose institutional share fund classes. These fund classes generally reduce asset-based fees overall.
Cover administrative services. If possible, choose a set of funds for your plan that doesn’t reimburse vendors for administrative services. Instead, have the plan itself cover administrative services and deduct them from participants’ accounts in a consistent fashion.
Aon Hewitt’s research reveals that 10% of employers charge an administration fee as a percentage of participants’ account balances, and 25% add administration fees uniformly to each fund’s expense ratio.
If you still want to charge all participants the same administrative fee regardless of the level of assets in their accounts or the nature of the investments, use an investment line-up that applies a discrete fee to participant accounts on an ongoing basis, typically monthly or quarterly. The percentage of employers that now use this approach is 26% of Aon Hewitt’s survey base, up from only 11% in 2009.
Don’t wait to act
401(k) plan fees and their connection to a plan sponsor’s fiduciary duties is one of the most litigated areas in retirement planning. To avoid problems, maintain internal processes to monitor whether your plan’s costs are reasonable for the offered services. An annual review of you plan’s allocation of administration fees should be standard.
Outquote: If possible, choose a set of funds for your plan that doesn’t reimburse vendors for administrative services.
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