If you are a plan sponsor, it is your responsibility under the Employee Retirement Income Security Act (ERISA) to choose and oversee plan investments and the services provided by plan-related personnel. Understanding and assessing the fees and expenses linked to plan investments, investment options, and services constitute a significant part of a sponsor’s ongoing responsibilities.
What categories of plan fees exist, and who is responsible for them?
- Plan Administration Fees: The day-to-day functioning of a plan involves expenses for fundamental administrative services, such as plan recordkeeping, accounting, legal, and trustee services. These costs may either be covered by investment fees deducted directly from returns or billed separately, wholly or partially, by the employer or charged directly against plan assets. In plans with individual accounts like 401(k)s, administrative fees can be allocated proportionally among individual accounts based on account balances (a “pro rata” charge) or passed through as a flat fee against each participant’s account (a “per capita” charge), with higher fees typically associated with more services provided.
- Investment Fees: The predominant component of plan fees is managing plan investments. Fees for investment management and related services are generally a percentage of assets invested and are deducted directly from investment returns, impacting the net total return. Employers should pay close attention to these fees as they are not explicitly stated on investment statements.
- Individual Service Fees: In addition to overall administrative expenses, individual service fees may be linked to optional features in an individual account plan. Participants choosing specific plan features, such as taking a loan from the plan or executing investment directions, may incur separate fees.
How can I assess plan fees and expenses?
Before engaging with potential providers, identify the specific services you require, including legal, accounting, trustee/custodian, recordkeeping, investment management, and advisory services. Specify the types and frequency of reports, participant communications, meetings, and investment transfer frequencies. Determine the level of responsibility, essential services, optional features, and any customized services desired.
Once you understand your requirements, obtain estimates from potential providers, providing identical information about your plan and desired features for meaningful comparisons. This information should include the number of plan participants and plan assets as of a specific date. To ensure a service contract or arrangement is reasonable, providers must furnish information about the services and compensation, aiding your assessment of service reasonability and potential conflicts of interest.
After selecting a provider or investments, vigilantly monitor service levels, investment performance, and ensure the plan meets your employees’ needs. You should regularly receive information to monitor returns and service provider performance, and be prepared to make adjustments if needed. Review notices about possible changes to compensation and other information provided by the service provider upon hiring or contract renewal, asking questions to make informed decisions for your plan and employees.
This article was co-authored by Ali Barnes, CPA, CGFM.
