Families who save their retirement funds in high-fee accounts could end up with one-quarter less money in retirement than those saving in low-fee accounts, according to the Congressional Research Service.
Investigations by the Congressional Research Service found that fees of 2 percent or higher are not uncommon in retirement plans. For couples who save their entire lifetime, the CRS study found that an annual fee of 2 percent rather than a more reasonable 0.4 percent could reduce savings by nearly $130,000.
Employers who sponsor retirement plans have a fiduciary duty to assess plan fees not only when you first hire investment consultants, money managers and other providers, but again every few years. But do you really know what you’re paying, let alone if the assessment is fair? Here’s a rundown of typical fees.
Investment management fees are typically the largest portions — often 70 to 80 percent — of total plan costs. Generally calculated as a percentage of assets invested, these fees are deducted directly from investment returns, and are not specifically identified on investment statements. Investment products that require significant management, research and monitoring services usually will have higher fees — which may or may not mean better performance. These fees are the most manageable and predictable costs to reduce, as employers typically have a number of funds to select from that meet their 401(k) plan needs.
Plan administration fees involve expenses for basic functions such as record keeping, accounting, legal and trustee services. The plan also may offer investment advice, customer support systems, and electronic access to plan information, online transactions or other services. Administrative costs may be covered by investment management fees and deducted directly from returns. When billed separately, you may cover them or they may be charged against plan assets. For a plan with individual accounts, fees are either allocated among individual accounts on a pro rata basis, or charged as a flat fee against each participant’s account.
Individual service fees are associated with optional features offered under an individual account plan. Fees are charged separately to the accounts of those who choose to take advantage of a particular plan feature, such as a loan from their account assets.
Revenue sharing. While “hard dollar” fees charged by providers are detailed in service agreements, many more fees go undisclosed. With few exceptions, mutual fund families pay marketing agents and administrators money—referred to as “revenue sharing”—for using their funds as investment options. Paid out of plan assets, these fees total as much as $1.5 billion annually. Despite the recent publicity about hidden fee arrangements, revenue sharing remains an entrenched if questionable practice. It’s legally permitted if disclosed, but often it’s not and nondisclosure is rarely enforced. Revenue sharing mostly affects small and mid-sized plans serviced by bundled providers. Large plans have the size and expertise to negotiate low fees, but small plans pay a higher percentage of assets in fees.
What Can You Do?
Try a fee audit. These audits are in-depth investigations that aim to uncover any hidden fees, determine a plan’s total costs and, if possible, negotiate waived or reduced costs going forward. While audits don’t necessarily lead to recovered funds, plan sponsors that undertake them at least find out if they’re being overcharged.
Experts advise plan sponsors to hire a fee-only, non-commissioned professional who has no other interest in the plan. Consultants stress the importance of asking the right questions — and knowing if you receive straight answers. Few service providers volunteer revenue-sharing data. Some will provide it when asked, and up to a certain point. If they refuse to provide the information you need, use publicly disclosed amounts in your calculations—and note the lack of cooperation from the vendor(s).
Armed with information about the true costs of their plans, you can often negotiate lower fees and/or additional services. Experts advise that no plan should pay more than 1.5 percent of assets, inclusive of everything. If negotiations don’t work, it may be time to shop for a new vendor.