Eroding Retirement Savings
Have you ever had to get your car repaired? Who hasn't? The worst part about getting a car repair done is sitting in the waiting room waiting to hear the verdict. You find yourself thinking to yourself, "How much dough do I have to fork out for my window to roll up normal again?" What makes these types of conversations painful is the fact that you know you're probably going to have to pay for that repair right now or else you'll be subject to nature's air conditioning... possibly in January. Retirement plan fees can be just as painful, if not more. The source of the pain is the fact that most retirement plan fees can be difficult to track down and pinpoint. Fees can silently erode retirement savings potential if you don't pay any attention to or do anything about them. If you are acting as a fiduciary on the retirement plan, you have a responsibility to act prudently regarding plan fees.
As a plan administrator of your 401k plan, the first place to look for plan fees is in the 408(b)2 fee disclosures. Most of the time, these disclosures are somewhat straightforward. Other times, it may seem like you'll need a cryptographer to run around France with you to find clues from ancient art to understand what's going on- "Davinci Code"... anyone? Sometimes requesting a "Plan Review" document as well will help you decipher the fees. Here are some common fees you may see in your 401k plan, though you shouldn't consider this a complete list. Fees can come out of participant assets, can be paid for by the plan sponsor, or a combination.
These fees pay for things like record-keeping, trustee, and accounting services. This sometimes pays for things like employee education, customer service, and a host of other services. It’s important to understand what services you’re paying for. I've seen my fair share of plans that are just way too expensive for the limited services received. Most of the time, the plan might have been competitive when it was started. But since most providers have more competitive pricing as assets in a retirement plan grow, if no repricing has been done in years, you could find yourself paying way too much for what you are getting.
I quick word of caution. Don't get me wrong, a cheap plan doesn't necessarily mean it's a good plan. I have seen my fair share of cheap plans that are, well... cheap. Sometimes Plan Administrators get convinced to move to less expensive record-keeping platforms without evaluating the new provider's services. They find out after the fact that the new platform leaves them with much more on their plate than they are qualified to handle. They didn’t realize that the fees they were paying for were helping them run their plan more effectively. On the flip side, there are plenty of companies that are paying for services they don’t fully utilize.
Financial advisors can be a great asset to your plan. They can provide participant education, manage investments, provide advice on how to remain compliant, benchmark the plan, and more. One thing advisors don’t do, work for free. If you’re not sure what your advisor is getting paid to do, look into it. There are a few ways an advisor can be paid. Most often, advisors are paid based on a percentage of assets. If they are being paid as a commission, it is often through revenue sharing via 12b1 fees embedded in the mutual fund's employees are invested in. Fee-based advisors generally receive fees through an ERISA account or and ERISA bucket.
Investment fees can come in all forms. I won't go into all of them in this post. What I do want to point out is that there are different share classes with different fee structures. For example, the XYZ made up fund may have cost more in one share class vs another. FINRA has a Fund Analyzer that allows you to compare different costs of a fund in different share classes.
These are the a la cart fees. Some of the common types of fees that pop up in this category are loan fees, transfer fees, QDRO fees, etc. You generally don't see these fees pop up unless you take a specific action.
Each provider in a 401k plan has an important job. Just because you can’t physically see what they are doing in the background doesn’t mean their job is less important. Just lick shopping for a car, it’s difficult to know if a car is a good deal unless you compare it to another similar car. Periodically you’ll want to compare your current plan fees, providers, etc. with new proposals to make sure you're still getting competitive prices and services.