Before a plan sponsor can determine whether or not fees are reasonable, they must first understand what the fees are. A study by the U.S. Government Accountability Office of 1,000 plan sponsors found that 50 percent of plan sponsors “did not know if they or their participants paid investment management fees or believed these fees were waived.”1 A whopping 82 percent had not asked about Sub-TA fees that reimburse the record keeper, and 70 percent had not asked about 12b-1 fees, which are used in part to market and distribute the funds. Half of the respondents did not ask about excess broker commissions, trading costs or wrap fees. Even though this is a fiduciary responsibility, the study clearly shows the fee discussion manages to elude the majority of plan sponsors. Too busy to check? Let’s look at the long-term cost to the participant. A Wall Street Journal article in November 2015 pointed out that for the difference in share classes of the same mutual fund, but with expense ratios of 1.39 percent for the R-1 and .64 percent for the R-6, an investor who contributes $5,000 per year for 40 years, the higher cost fund will erode $130,000 from the investor, or 17 percent of the investor’s entire savings.2 This doesn’t have to happen to you or your employees.
This is not new. Despite the multitude of articles published in various newspapers, journals and magazines, the many whitepapers, lawsuits and best practices guides from various organizations, the practice of over-charging what is necessary continues today. The best comparison I have is that of The Matrix. In the movie, Neo, played by Keanu Reeves, must first get inside The Matrix before he can understand how to break its code and control it, instead of being controlled by it. It is important for plan sponsors to “break the code” of retirement plan fees, in order to best position themselves and their employees to have the greatest chance at a successful retirement.
I will end with one example of how to get out of the matrix: unwind and unbundle all of the fees in your retirement plan. Separate all costs from all providers where able. Reduce or eliminate all revenue sharing arrangements. Put your advisor on a fee-based compensation as a percentage of plan assets or a flat fee. Use institutional or the lowest share class funds available for your plan size. Renegotiate as your plan grows. Pay as much of the administrative costs from the company where you may get tax deductions for the business, instead of out of participants’ accounts where you get none. Do not allow brokers to get a finders-fee commission upfront for moving the plan to another provider. These tips are not all-inclusive and your plan may have nuances that prevent the use of these strategies. There are additional strategies. But if you are not having these types of conversations with your advisors or providers, we should talk.
There are plenty of ways to reduce fees in a retirement plan. Fragasso Retirement Plan Advisors would like to help educate and guide you through the matrix of retirement plan fees. For a no-obligation appointment, please contact us at 412-227-3200.
1 GAO-12-325 Survey of the 401(k) Plan Sponsors
2 WSJ “Why You Should Check Your 401(k) Plan’s Fees,” November 9, 2015
Read more blogs from this series!
Retirement Plan Success Series: Part 1: So you are a fiduciary!
Retirement Plan Success Series: Part 2: Plan Design Matters… a LOT!