The issue of fees and expenses related to the operation of a 401k plan continues to draw great attention. We have pulled together a number of items that we think will give you a good feel for the issues you need to consider.
This archive contains not only the most current material on the topic, but also older items that are still relevant, provide background, perspective or are germane to the topic.
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At year-end 2019, 401k plan assets totaled $6.4 trillion, with 37 percent invested in equity mutual funds. In 2019, the average expense ratio for equity mutual funds offered in the United States was 1.24 percent. 401k plan participants who invested in equity mutual funds, however, paid about one-third of that amount -- 0.39 percent -- on average. The expense ratios that 401k plan participants incur for investing in mutual funds have declined substantially since 2000. This is a 32-page report.
Until recently, it appeared that plaintiffs' firms had taken a hiatus from excessive fee litigation targeted at large companies. Now there has been an uptick in fiduciary litigation involving 401k and 403b plans of private employers. Last month, at least three new excessive fee cases were filed in Wisconsin and at least seven additional excessive fee cases were filed in other jurisdictions.
Several key recordkeeping fee decisions are important for prudent plan fiduciaries to analyze carefully. More often than in the past, when plan sponsors benchmark their plan fees, they often use the opportunity to evaluate the way fees are allocated to participants and to make changes to the way fees are paid. Three key recordkeeping fee decisions that go directly to the heart of the question of how fees should be allocated across participants are discussed in this article. First is the decision as to the type of recordkeeping fee structure. Second is the decision around using a lowest-cost share class strategy for the investment menu versus a revenue-sharing model. Last is the decision of how to apply revenue sharing when there is an active decision to use that model or when it is unavoidable.
Almost every employer that sponsors a retirement plan should be concerned about potential liability for a type of exposure known as excessive fee claims. Historically filed against only the largest organizations, an increasing number of smaller retirement plans have faced excessive fee litigation over the past couple of years. With this surge in litigation, it's important that all fiduciaries, regardless of plan size, understand the history and recent trends relating to excessive fee claims, the plan features that may make it a target of litigation, and steps fiduciaries can take that may reduce exposure to excessive fee claims.
Fee compression is also being driven by forces outside the market, specifically the rash of fee litigation and settlements that have forced plan sponsors and fiduciaries to consider lower-cost investment options. Complicating the question of asset management fees is the increasing pressure on recordkeepers to drive down administrative costs to plans, or potentially drive more suits.
The events of the past few months have had a dramatic impact on nearly every business. Now, more than ever is a time to review expenses and cut back where possible. One possible area to explore cost savings is in your 401k or other related retirement savings plan. Plan sponsors might start here for a variety of reasons. Here are some insights.
Companies are becoming more open and willing to pay retirement plan servicing fees. This article focuses on Non-Settlor fees which typically include the following service providers: Third-Party administration services, investment advisory services, recordkeeping platform services, and employee benefit audit services. There are some compelling benefits for a company to pay these plan fees.
401k provider services and investments can vary dramatically in terms of breadth, depth, and price. Benchmarking 401k fees on an all-in basis helps normalize these differences, putting the onus on a 401k provider to justify higher fees. This article provides a 3-step process you can use to compare fees, including where to find the administration and investment fees for ten leading 401k providers. In short, a "Rosetta Stone" for finding 401k fees.
In a lawsuit targeting the Pharmaceutical Product Development Retirement Savings Plan, the plaintiffs allege that fiduciaries of the plan violated their duties under ERISA. They say the plan fiduciaries failed to objectively and adequately review the plan's investment portfolio to ensure each investment option was prudent in terms of cost and maintained certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories.
Liberty Mutual is facing a class-action lawsuit brought by its 401k participants, who allege the plan's recordkeeping fees were out of control and the insurance giant allegedly violated ERISA by failing to rein them in.
Source: Investmentnews.com (registration may be required), April 2020
A federal judge has found that a provider breached its fiduciary duty of overseeing its own 401k by failing to monitor proprietary funds and its recordkeeping expenses, though it was not obligated to consider options other than mutual funds.
Plan sponsors have heard -- and many excessive fee lawsuits state --that larger defined contribution plans, in terms of assets, pay lower fees. But do they? Determining whether fees are reasonable for participants requires an additional layer of calculation, and some fee elements and allocations make it more complicated than it should be.
More good news about fees and fee compression as plan sponsors and participants increasingly realize the long-term implications they can have on retirement. Both large and small plans saw cheaper prices for investment and administration, regardless of the situation and scenario.
Today, the landscape is rapidly shifting, and it definitely seems to be the case that per-participant recordkeeping fees are becoming the expected best practice, no matter what size the plan. Plaintiffs' attorneys and progressive plan sponsors are driving this trend. Their argument is simply that, with today's digital recordkeeping technology, it is no more work for the plan provider to administer an account with $1,000,000 versus an account with $100. Thus, the argument goes, it is not reasonable under ERISA for the fee to grow while the service being provided remains the same.
Thanks to innovation and a competitive market, 401k mutual fund fees keep falling. ICI has a window into this information through our study of the cost of providing 401ks, in which they take a close look at the expenses and fees of mutual funds incurred by 401k plan investors, and in related research on fund fees through a collaborative research effort between ICI and BrightScope.
Fiduciaries often are aware of administrative and disclosure requirements, but sometimes become negligent when choosing funds with reasonable fees. Even those who are aware can inadvertently fail to select the best mutual fund. While 401k fees have decreased in recent years because of litigation and various DOL regulations, mutual funds can still charge indirect fees that DOL would deem unreasonable. Unfortunately, fiduciaries with little knowledge regarding fee structures may authorize a plan to charge fees, decreasing participant balances.
Investment advisor and recordkeeper searches are a very important aspect of the fiduciary duty of "procedural prudence," i.e., setting up and carrying out prudent processes that are intended to render beneficial results for participants. They provide 401k and 403b plan fiduciaries the opportunity to ensure not only that fees are reasonable, but also that the appropriate services, technology and education are being provided to the plan participants.
When employees file complaints against their employers with the U.S. Department of Labor, fees for their retirement plan services is a very common reason. A burgeoning era of employee activism is underway in which plaintiff lawyers are finding fertile ground for litigation opportunities, catching many employers unprepared. Many other employers are ready, however, using an approach that offers a legally defensible result.
One of the many duties plan fiduciaries have is to understand the fees and expenses charged to their employer-sponsored defined contribution plan. This is a guide to the different plan fee pricing models and the steps to take to ensure fees are reasonable.
While a plan's investment fee structure is now readily available via required annual notifications to employees, they don't make for the easiest reading. There are five main areas that are crucial in looking "under the hood" to see the total cost structure of a plan.
Sponsors of small and midsize plans may be paying too much in fees, particularly if they're being charged a percentage of total plan assets, according to industry experts. The disparity can be attributed to both the plan sponsors themselves and the recordkeepers. Sponsors of small and midsize plans often don't have the time or knowledge to benchmark fees. Meanwhile, recordkeepers have pursued their own self-interest, pushing smaller plans into asset-based fee models, which may hurt participants long term, industry observers say.
Tussey v. ABB, after winding through earlier settlement awards to the plaintiffs, two appellate hearings in the 8th Circuit, and double rejections by the U.S. Supreme Court, ultimately will be remembered both as a case about plan sponsors' fiduciary duties and one that defined how to quantify participant losses from related breaches. As a result, the retirement plan industry has moved in a unified way to press for reductions in service provider fees, opt for lower-cost share classes, and insist upon greater transparency for recordkeeping and asset management costs.
While some of the compression can be attributed to vendor consolidation and scale, why would billion-dollar financial services organizations continue to invest in recordkeeping capabilities where profits have traditionally been so thin? The answer is: they believe there is an opportunity to generate additional revenue beyond the recordkeeping fees for servicing retirement plans. Generally, there are five areas where recordkeeping vendors have tried to monetize their relationship with retirement plans.
This article breaks down what 401k expense ratios are and why they matter. Then it will walk you through the latest data on average fund fees, and end with insider tips sourced from industry experts on how you can lower fund fees for your plan.
What the heck is a 404(a)(5) participant fee disclosure? And what are the requirements around sending them? This article demystifies this important document, breaking down what it is, why it's important, and everything else you need to know about sending it.
401k plans are expensive. Plan fees, taken as a percentage of the assets, can add up to a huge chunk of change that can take years off of your or your employees' retirements. A two percent fee doesn't sound like daylight robbery, but over 35 years, that little fee can consume up to half of your retirement earnings. All of this is to say that minimizing 401k fees is crucial for retirement success. Of course, easier said than done.
For the third year in a row, respondents to the annual Callan Institute "Defined Contribution (DC) Trends Survey" specified reviewing their plan fees as a key area of focus and as the best way to improve their fiduciary position as plan sponsors. Asked in the fall of 2018, 106 defined contribution (DC) plan sponsors, both Callan clients and other organizations, said that for 2019, assessing fees was more important than any other activity they undertook in managing their plans.
Fees charged in defined-contribution plans rank as plan sponsors' top area of focus in 2019, according to a new report, as employers continue to worry that high fees for functions like administration and investment management could expose them to legal liability.
Source: Investmentnews.com (registration may be required), January 2019
Many 401k fiduciary lawsuits have focused on fees including, their reasonableness, their necessity, and whether the fees are being assessed for funds and services add value and help participants achieve their retirement goals. How often do you check up on your retirement plan fees? Investment committees need to be aware of their fiduciary duties and remain vigilant in carrying them out.
Employers have a fiduciary responsibility to ensure the fees paid by their 401k plan participants are "reasonable" and not subject to unnecessarily excessive fees. To do that job, employers must benchmark their 401k fees - basically, compare them to industry averages and/or fee charged by competing 401k providers. Sounds straightforward, but this information is hard to find and often harder to compare on an apples-to apples basis.
As a plan sponsor, you are required to understand all of the fees that are associated your organization's retirement plan benefit program. This is a challenge because plan fee structures are often opaque, complicated, and downright misleading. The most effective way to meet your fiduciary requirement is a Request for Proposals process, typically run every three-to-five years. Why? The 401k and 403b markets are extremely competitive. They are constantly evolving and changing.
Source: Fiduciaryplangovernance.com, November 2018
With increased government scrutiny, ERISA lawsuits at an all-time high, and the plaintiff's bar not only increasing in number but in sophistication, 403b plan fiduciaries will continue to face high exposure if they fail to prudently select and then continue to monitor the investments options of their plans and plan fees. Litigation is not limited to large plans, as plaintiffs and the DOL have found that smaller plans are “low hanging fruit” in terms of finding ERISA violations.
Plans compare their returns by asset class to selected benchmarks that reflect their investment goals for the asset class. Plans pay fees to external asset managers with the expectation that the managers will exceed these benchmarks. As such, this paper focuses on the benchmarks to assess the role of fees. The question is whether higher fees help or hinder the ability for a plan to outperform its chosen benchmarks.
it's critical for employers to understand the various components of their retirement plans' fees, particularly indirect fees like revenue sharing arrangements. This 4-page article describes common ways in which money flows through retirement plans. Each provider may operate differently, so be sure to check with your provider for information specific to your plan.
The price of recordkeeping services is not uniform; it can vary depending on type of retirement plan. This article discusses why pricing for 403bs is different than that for 401ks including four factors that impact 403b pricing.
401k plan fee reductions have been occurring in recent years as retirement plan vendors made a land grab for their share of the DC plan market. To date, those 401k plan fee reductions have applied mostly to costs for core services, such as administration and recordkeeping. If they haven't already, sponsors may soon experience higher 401k and 403b plan fees for "extras" such as plan distributions or loans, that only occasionally impact a portion of participants.
This paper discusses retirement plan fees and expenses with the intention of assisting retirement plan sponsors in achieving a greater understanding of their plan fees. For the purposes of this paper, it will categorize the fees and then detail the specific functions typically related to each expense.
Under ERISA, retirement plan sponsors have a fiduciary duty that requires them to act solely in the interest of plan participants and beneficiaries. Plan sponsors are also limited to using plan assets for the reasonable expenses of administering the plan. Using plan assets for other plan expenses could be a breach of the sponsor's fiduciary duty and lead to potential fines and costly litigation.
403b plans are fundamentally different than 401k plans. Many of these differences result in a greater amount of work required to administer 403b plans and more work equals more money. This article looks at a few of the major 403b plan price drivers that do not exist in 401k plans.
At the source of every headline grabbing fiduciary breach trial is a fee mistake. How can learning more about these everyday fee mistakes help 401k plan sponsors avoid them and the fiduciary liability they bring? Here are three of the most common plan sponsor fee mistakes and what to do to avoid them.
One of the perennial issues facing the sponsors, participants and fiduciaries of 403b plans, as well as the consultants servicing or advising such individuals or plans, is plan expenses. Section 403b plans, particularly those that are covered ERISA, must carefully watch what they spend with their limited resources.
A vital plan fiduciary responsibility is regular benchmarking of plan performance and fees against industry averages. This kind of cross-referencing is the responsibility of plan sponsors and can come with significant risks and opportunities. This article looks at the factors that make sound benchmarking practices so crucial.
Many small-business owners and managers don't have a good feel for how much they or their employees pay in fees to their retirement plans, according to a survey conducted by The Pew Charitable Trusts. The survey results indicate that many of these business leaders -- like many workers -- have limited knowledge about plan fees, a reality that can be detrimental to workers' long-term finances. Whether savers pay high or low fees on their investments can make a large difference over time in the growth of retirement savings.
Plan sponsors, still feeling the pressure of the Department of Labor's six-year-old fee disclosure rules and the threat of fee-related litigation, are continuing to place 401k fees under the microscope. A number of other factors continue to drive down 401k fees, including a competitive marketplace, growing client awareness about fees, sharper value propositions from advisors, an increase in the quality and volume of reporting of plan outcomes, and an industry shift toward fee-based plans and low-cost investments.
With retirement plan fees serving as the centerpiece of ERISA fiduciary breach lawsuits, understanding the dynamics of retirement plan fees is critical for plan sponsors and fiduciaries. Regardless of plan size or defined contribution plan type, fees have become a primary focus and concern of plan fiduciaries. This article explores the three types of fees that retirement plan fiduciaries need to understand and evaluate.
Following the findings expressed in three other Circuits, the United States Court of Appeals for the Ninth Circuit recently held that plan administrators are not ERISA fiduciaries when negotiating their own compensation with prospective customers. Instead, because the employer/plan sponsor has the express duty under ERISA to defray reasonable expenses of administering a 401k plan, any claims that fully disclosed fee arrangements are unreasonable "lie against the employer, not the service provider."
As a plan sponsor, you are required to understand all of the fees that are associated your organization's retirement plan benefit program. This article wraps up the three part series on the subject.
Source: Fiduciaryplangovernance.com, February 2018
As a plan sponsor, you are required to understand all of the fees that are associated your organization's retirement plan benefit program. This article continues the series on the subject.
Source: Fiduciaryplangovernance.com, February 2018
As a plan sponsor, you are required to understand all of the fees that are associated your organization's retirement plan benefit program. This is a challenge because plan fee structures are often opaque, complicated (needlessly so) and, sometimes, downright misleading.
Source: Fiduciaryplangovernance.com, February 2018
Employers are moving to reduce their 401k plan costs in greater numbers, largely in an attempt to avoid the fate of peers who've been sued for allegedly excessive fees in their defined-contribution plans, new research suggests.
Source: Investmentnews.com (registration may be required), January 2018
Plan fiduciaries must review service provider fees annually against reliable indicators as part of proper plan governance. The efficacy of any such review depends upon the ability to break out fees for each service and to utilize acceptable benchmarks, rather than self-serving benchmarks supporting excessive fee arrangements.
NEPC's Ross Bremen, CFA, Partner, and Kevin McCullough, CFA, Analyst, hosted this review of NEPC's 12th Annual DC Plan and Fee Survey. NEPC conducted the Survey to capture data and trends around plan design, and to help plan fiduciaries better understand and measure the investment and administrative costs of their plans.
Investment consulting firm NEPC's annual defined contribution plan and fee survey reported that recordkeeping, trust and custody fees remained flat over the past year, the first time it hasn't declined since 2010.
While lawsuits and investigations have served a purpose in lowering plan fees, a side effect is that many plan sponsors, in their concern to meet compliance standards, have made a search for the lowest fees such a priority that they have unwittingly overlooked the best way to serve plan participants.
For years, fees on investments in workplace retirement savings plans have been falling. Now, at least for the moment, they're stalling. But there's room for improvement in plan options, and look out for new fees creeping in.
Source: Investmentnews.com (registration may be required), August 2017
A common theme running through class-action lawsuits filed against plan fiduciaries is the violation caused by not properly understanding and addressing the fees of their 401k plan. The article describes three methods for determining if plan fees are reasonable.
As 401k fees are being challenged in excessive fee lawsuits, and participants are, rightfully, checking their accounts and verifying their fees, it is prudent to have fees that are fair and transparent.
What is a Plan Expense Account (also known as an ERISA Account, ERISA Budgets Account, or Revenue-Sharing Account)? This 5-page white paper deals with what they are, who are they for, how they work, why they exist, and how they are handled.
With retirement plan fees serving as the centerpiece of fiduciary breach lawsuits, it is no wonder that this is the leading topic of interest with retirement plan fiduciaries.
Plan sponsors' desire to reduce plan costs is substantially impacting their approach to investment menu design and their relationships with defined contribution plan investment managers, according to findings from Retirement Planscape, an annual Cogent Reports study by Market Strategies International.
You are also required to ensure the services for which the plan is paying are necessary and reasonable. The most effective way to meet this fiduciary requirement is a Request for Proposals (RFP) process. This is part two in a series on making sure 401k and 403b fees are "necessary" and "reasonable."
A plan sponsor is required to understand all the fees that are associated your organization's retirement plan benefit program. This is a challenge because plan fee structures are often opaque, complicated, and sometimes, downright misleading. You are also required to ensure the services for which the plan is paying are necessary and reasonable. The most effective way to meet this fiduciary requirement is a Request for Proposals (RFP) process.
What if I told you that there is a fee present in mutual funds that is not included in the fund's published expense ratios and is often not publicly disclosed by the fund companies, since the SEC does not require its disclosure? You might laugh, but it is true.
The cost of investing in equity, hybrid, and bond mutual funds through 401k plans fell again in 2016, according to a research study that the Investment Company Institute just released. The 32-page study also shows that participants who invest in mutual funds in their 401k plans tend to hold lower-cost funds.
The topic of 401k fees has dominated the headlines for the better part of this decade. Running a company 401k plan is an arduous task. Navigating fiduciary responsibilities is also a potential minefield of liability as ambitious law firms aggressively attempt to exploit the subjective regulatory frameworks of the IRS and the DOL. Nowhere within a 401k plan is there more potential liability than with regard to the subject of fees.
As a plan fiduciary, you have a responsibility to ensure your service providers' compensation is reasonable relative to the services provided. A fiduciary process for assessing fees can help meet your obligation to provide a plan that operates in the best interest of your employees. Your plan provider or consultant can help you navigate this process by helping you answer four key questions.
Fee reasonableness is a fundamental and widely discussed fiduciary topic. Despite the importance of the topic, the DOL hasn't given much insight or guidance as to what is considered a reasonable fee. As a result, much of the interpretation of what is and is not reasonable has come from the courts. As a fiduciary, it is important to turn to litigation for guidance, acknowledge how excessive fee allegations have evolved, and most importantly, to appropriately manage this risk in the future.
Given the 12b-1 fee's implicit conflicts -- and their declining relevance -- arguably it's time to create a more appropriate pricing structure for the realities of today's investment marketplace.
If you're a 401k fiduciary, you don't want to be in the dark about your plan fees. The potential consequences for paying excessive 401k fees are too great. This FAQ will answer some of the most common 401k fee questions.
When monitoring investment and recordkeeping fees, a plan sponsor would be smart to remember the recurring themes of recent 401k participant fee lawsuits. This article reviews the themes that have frequently arisen in recent fee lawsuits.
There's no question fees are a hot topic for defined contribution plan sponsors. But one risk of focusing too tightly on fees is creating a distortion that addresses cost while possibly overlooking other retirement-saving factors. With so many equal or greater concerns, it's important for plan sponsors to keep a broad perspective and maintain a comprehensive approach to their fiduciary duties.
Understanding your retirement plan's fees is not only a good practice, it's a fiduciary requirement. The principal reason fees have been thrust into the limelight is that plan participants often bear most, if not all the cost of running the plan. This article does not discuss how to determine if fees are reasonable, but instead explores a relatively new debate over which fee assessment methodology is fairer.
Source: Strategicbenefitservices.com, January 2017
Fiduciaries of very large plans who wouldn't think of not haggling with a dealer over the price of a new car or a hotly negotiating a business deal have sometimes neglected to leverage their plan's size to negotiate lower 401k fees. The result is a sharply increased risk of being sued.
Source: Cohenbuckmann.com, January 2017
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