Keeping Track of Fees
The Cost of Managing a 401(k) Plan

By Patricia Lawrence, Human Resources Manager

As retirement savings plans go, 401(k) plans are in the driver’s seat as one of the most popular options in the U. S.

The appeal of 401(k) plans arose as a result of their flexibility, portability and retirement-friendly tax legislation. Sponsoring a 401(k) plan can provide tax benefits for the employer and give employees greater control over their retirement savings.

However, sponsoring or participating in a 401(k) plan can come at a price. That price is the accumulation and assessment of 401(k) fees.

Some of these fees are identifiable costs and some are built into the cost of managing and maintaining the plan. These fees can be virtually invisible to a plan sponsor, even more so to a plan participant.

Several types of fees are attached to the management of a 401(k) plan and are paid by the plan sponsor, the plan, or the participant, or divided among all three. Administrative, investment management, and individual service fees are the most prominent of the 401(k) fees.

Administrative fees generally cover the cost of plan administration, legal compliance, record-keeping, audits, statement preparation, trust services, consulting, voice response systems, access to customer service representatives, electronic access to plan information, daily valuation and online transactions. Administrative fees are identifiable fees since they can be easily recognized and itemized as a flat base fee or a flat dollar amount per the number of individuals (active or inactive) who are participating in the plan.

If a plan has at least 1,000 participants, the cost of managing the plan is spread over a large group of people and reduces the administrative fee per participant. On the other hand, if the plan is small (around 100 participants), the administrative fees would likely be higher per participant, since there are fewer individuals in the plan. According to the Department of Labor, the cost of administrative services can also be covered by investment fees that are deducted directly from investment returns.

With the array of investment choices in a rapidly changing 401(k) marketplace and the increased level of services available to 401(k) plan participants, it is no wonder that investment management fees and expenses are the priciest of all the 401(k) fees. Elizabeth Opalka, the author of How to Protect and Manage Your 401(k), emphasizes that investment fees may come in the form of sales charges, loads or commissions (transaction costs for the buying and selling of shares). Opalka also notes that management fees or maintenance fees are an ongoing charge for managing the assets of the investment fund. Furthermore, investments requiring significant management, research and monitoring services generally will have higher fees.

Both plan sponsors and plan participants alike “should pay close attention to these fees, since service providers deduct them directly from investment returns,” Opalka writes. The investment fees are calculated as a percentage of the 401(k) account balances. Thus, a participant’s “net total return is the return on investments after the fees have been deducted. These fees are not specifically identified on 401(k) account statements.”

The Department of Labor permits the use of individual service fees for various options under a 401(k) plan. These services are specific to individual accounts and could include costs for processing a loan or executing a participant’s investment directions.

The Employee Retirement Income Security Act of 1974 (“ERISA”) requires fiduciaries or plan sponsors to comply with certain rules in managing a 401(k) plan. One of these rules is that fiduciaries “must act solely in the best interest of participants.” This means that fiduciaries should, among other things:

Over time, excessive fees can significantly reduce retirement savings, particularly during a bear market. In an effort to ensure that retirement savings are not being eroded by excessive fees, fiduciaries must comply with all ERISA rules and participants should be cognizant of the fees that can be assessed against 401(k) account balances.