401(k) Fee Increase? Here's Your Plan Sponsor To-Do List

When you sponsor a retirement plan regulated by the Employee Retirement Income Security Act (ERISA), you’re responsible for decisions that benefit participants — and that includes making sure plan fees stay reasonable. This is part of your fiduciary duty of loyalty, and it’s not optional.

Say you get a notice from your 401(k) provider: the annual account fee is increasing from 0.15% to 0.25%. What do you do? Here’s a hint: you can’t just frown, set the notice aside, and get back to your busy day. Read on for a practical to-do list for fulfilling your fiduciary obligations — including options for responding to the increase, as well as pointers on benchmarking fees and knowing what’s actually reasonable — so participants get the maximum benefit of saving for retirement.

Taking Action: Fee Increases

Receiving a notice from your 401(k) provider that the annual, asset-based fee is increasing from 0.15% to 0.25% may seem like no big deal. Afterall, the costs of everything are rising, right? But remember, fees compound over decades, not years, and even seemingly small increases can meaningfully erode participant balances over a full career. For example, the Department of Labor points out that a 1-point fee difference can reduce a retirement balance by 28% over 35 years.

Ok, but your notice indicates a fee change of .10%. What’s the problem? As 401k wellness guru Scott Pooch points out, there are actually two problems for plan sponsors in this real life example: 

• A 401(k) provider just raised its annual account fee from 0.15% to 0.25%. That near-doubling is worth being annoyed about — but it’s only half the story.

• The fee isn’t the only problem. Where it’s coming from is as well.

• Now look at how it’s charged. It’s asset-based — pulled straight from employees’ account balances every month. The bigger the balance, the more you pay. So the owner and the highest earners lose the most, and they lose the compounding on it for the next 20 years too.

From Pooch’s perspective, solving these two problems is doable, ideally with the help of an on the ball accountant. The solution may not even require switching 401k providers. Here’s are the action steps Pooch recommends: 

• First you see whether the fee itself can be negotiated down. 

• Then you decide who should actually pay it.

• In many plans, the company can pay the administrative fees directly, by check, instead of letting them come out of accounts. When you do:

• The check is a deductible business expense.

• Every dollar of fees stays invested, compounding for the owner and key people.

• Fiduciary exposure drops, because the fees aren’t drawn from the plan.

• And you get a recruiting line most employers can’t say: “we offer a strong 401(k), and the company covers fees that would come straight out of your account almost anywhere else.”

In addition to offering a concrete look at what decision making and monitoring responsibilities can entail for plan sponsors, this example also illustrates how useful it can be to have a trusted advisor or consultant in your corner. Ideally, as Pooch reminds us, an advisor plays a vital, proactive role in assisting you to look at all your options and make informed choices as you steer the plan (and your business) forward. 

Understanding The Basics: Plan Fees

If you don’t yet understand how plan fees work, getting up to speed is now an essential action item on your to do list. Afterall, no amount of outsourcing frees you from ERISA fiduciary responsibilities that you as the sponsor can be held personally accountable for, such as:  

• Decisions: Do you have the right advisor, and investment options? 
• Cost control: Are the plan fees reasonable and services solid?
• Compliance: Do operations adhere to the plan document, and government regulations? 

The Department of Labor (DOL) publication, A Look At Plan Fees, provides a solid overview on what you need to know about plan fees. You may also find this summary of 401k fee categories from Human Interest helpful:

1. Administrative fees: Include customer support, recordkeeping, and legal services. Depending on your plan, employers may cover 401(k) administration costs, or you may pass them on to employees as flat fees or as a percentage of the assets in the plan (which makes plan sponsors liable for these fees).

1. Investment fees: Charged to plan participants as a percentage of fund assets. Plans can invest differently, including managed investment funds (although mutual funds may be more cost-efficient than target-date funds). Because expense ratios cover the operating costs of funds relative to a participant’s assets, it’s wise to consider low-cost funds and watch out for hidden fees….

1. Transaction fees: Some providers charge plan participants fees for utilizing specific plan features such as loans, hardship withdrawals, financial advisory services, and more. Individual service fees can reach up to $500 per transaction, depending on the reason—although some providers don’t charge any transaction fees.

With clarity on plan fees in hand, benchmarking the costs of the company sponsored plan against the field becomes relatively straightforward, and there are tools available to assist. For example, many plan sponsors find the 401k Averages Book a useful resource for determining if the plan fees are above or below what is typical.

While periodic benchmarking is important, remember it is insufficient toward fulfilling your obligations under the high standards of ERISA law: you must also act decisively if the fees and services are not in the best interest of participants. Additionally, documentation of your benchmarking and decision making processes, as well as the resulting steps taken is critical. 

Important To Know: Proof Of Wrongdoing Is Not Necessary…

What many plan sponsors fail to understand is that even with great diligence, it’s still possible to get caught up in costly and disruptive ERISA investigations and litigation. Proof of wrongdoing is not necessary when it comes to being accused of a fiduciary breach, as Eric Dyson of 90 North Consulting explains: 

Plaintiffs’ firms do not need proof of wrongdoing. They need public data and a plausible theory. Form 5500 filings are mined every year. Recordkeeping fees are calculated per participant. Share classes are compared. Investment menus are reviewed online. Many complaints quote directly from publicly available filings.

ERISA Defense for plan sponsors is an out of pocket expense that adds up quickly, averaging $600 per hour. 

To ensure all retirement plan sponsors have protection, Colonial Surety Company offers an affordable Fiduciary+Cyber Liability Package that can be bundled with the Department of Labor’s required ERISA Fidelity Bond. (Remember, an ERISA Bond protects the retirement plan from losses due to theft or fraud—it does not protect a plan sponsor in the face of errors, oversights or allegations of a fiduciary breach.)

Uniquely, the Colonial Surety Company ERISA Bundle combines three essential protections in one seamless package:

• ERISA Fidelity Bond — Fulfills your federal mandate to protect plan assets from fraud and dishonesty
• Fiduciary Liability Insurance — Provides up to $1,000,000 in coverage for legal defense costs and penalties arising from fiduciary errors, administrative oversights, and participant claims
• Complimentary $50,000 Cyber Liability Insurance — Protects your plan and company against regulatory actions following a data breach, addressing the DOL’s cybersecurity guidance directly by including expert response services.

Colonial Surety Company is Treasury-Listed, rated “A” (Excellent) by AM Best, and has been in business since 1930. As a direct carrier — not a broker — there are no agent markups or unnecessary fees. You can quote, purchase, and download proof of coverage entirely online in minutes.

Don’t wait for a participant complaint, DOL inquiry, or cyber threat to find out what you’re missing. 

Get an instant quote on Colonial Surety Company’s ERISA Bundle today — and protect your plan, your business, and your personal assets in one smart move.

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