When shopping for a new car, I am often frustrated by the number of variables that can affect a car's price – discounts, trade-in value, taxes, tag fees, dealer prep, etc. For me, it’s simply easier to ask multiple dealers to give me their best “all-in” (i.e., out-the-door) price for the car I want. That way, I am not surprised by unexpected fees and can compare any price differences on an apples-to-apples basis. I recommend business owners use the same “all-in” fee approach when evaluating the "reasonableness" of their 401(k) fees - an important fiduciary responsibility
The problem? Current DOL fee disclosure rules do not obligate 401(k) providers to disclose their fees in a straightforward or uniform format. Some providers take advantage by burying some or all of their administration fees in fund expense ratios - making it harder than necessary for business owners to total their dollar amount. The good news? Business owners can easily avoid these "hidden" 401(k) fees - generally, revenue sharing and variable annuity wraps - by using a provider that charges easy-to-total "direct" fees - which can be deducted from a corporate bank account or allocated among plan participants - exclusively.
Under an all-in fee approach, all plan administration fees and investment expenses are summed into a single dollar amount. This approach “normalizes” the numerous fee arrangements used by 401k service providers, including compensation paid to providers from plan investments, making it easier for the sponsor to compare fees provider by provider.
It does matter if fees are paid directly by an employer or deducted from participant accounts or paid indirectly from revenue sharing or wrap fees. Regardless of the compensation’s origin, it should be included in the all-in fee total.
Learn more about “all-in” fees in this 401(k) fee study from Deloitte and the Investment Company Institute.
Plan sponsors – especially sponsors of small business 401(k) plans – derive two key advantages using “all-in” fees:
Ease of comparison – As in the car buying example, sponsors have a total price to compare providers. The best value may not always be the lowest price, but sponsors have a starting point for a meaningful analysis of fees.
Control of the process – With an “all-in” fee in hand, the sponsor is in a position to ask questions and control the flow of information. The sponsor can ask each potential provider to describe the value of services provided – exactly where the pricing discussion for small business retirement plans need to go.
Plan sponsors with these shopping advantages effectively level the playing field and fundamentally change 401(k) fee discussions from cost to value. Many fee disclosures today include a patchwork of fees presented in dollar values and percentages of assets, leaving the plan sponsor to cobble together a fee total.
When an all-in fee is provided, it’s up to the service provider to support the fee total and the value of its underlying services. A seemingly subtle difference, but with powerful ramifications. With the “all-in” fee, the field is flipped – the plan sponsor goes on offense, and the providers switch to defense.
In 2014, we advocated this approach in our response to a DOL request for 401(k) fee disclosure reform comments. We hope the DOL views an all-in fee as a simple way to improve the effectiveness of 401k fee disclosure and incorporates this change into a new ERISA 408(b)(2) regulation.
A DOL move toward the “all-in” fee will make the market for 401(k) services more efficient and competitive. Sponsors will have the ability to choose between cost and value as they see fit, and help them meet fiduciary responsibilities.