Calculating ADP 401(k) Fees Using Their 408b-2 Disclosure

One of the largest small business 401(k) providers in the country is the payroll company ADP. Due to my firm’s fee comparison service, I get the opportunity to evaluate ADP’s 401(k) fees regularly. As a result, I’ve become very familiar with their DOL-mandated 408b-2 disclosure – which describes the company’s services and fees. While its generally clearer than insurance company 408b-2 disclosures, it can hardly be called intuitive.

My big problem with the ADP 408b-2 is how it discloses revenue sharing payments – which are 401(k) provider fees paid by plan investments. ADP isn’t legally obligated to disclose the dollar amount of these fees in their 408b-2, so they don’t. Instead, they only disclose the percentage paid by each plan investment. That makes it harder for 401(k) plan sponsor to total their ADP fees and evaluate them for ”reasonableness” - an important 401(k) fiduciary responsibility.

If you’re an employer with an ADP 401(k) plan, I want to help you total your ADP fees – because you’re probably paying higher fees than you know. Below is the 3-step process I use to total ADP fees when comparing them to our fees. You can use the same process to total your ADP fees. I’ll use an actual ADP 401(k) plan as an example. Once done, you’ll be ready to evaluate the total cost of your ADP 401(k) plan – including the dollar amount paid by revenue sharing - for reasonableness.

Step #1 – Confirm the ADP 408-b2 disclosure covers all of your 401(k) fees

ADP provides all 3 of the major 401(k) plan administration services – asset custody, participant recordkeeping and Third-Party Administration (TPA). For this reason, the firm is considered a “bundled” 401(k) provider. ADP’s administration services are described in the Recordkeeping and Administration Services section of their 408b-2 disclosure. In addition, ADP may also provide investment advice. If they do, this service will also be described in their 408b-2.

Because ADP is a bundled 401(k) provider, they’ll likely be the sole professional services firm used by your 401(k) plan unless you use an outside (non-ADP) financial advisor for investment advice. If you do, you’ll need to review their 408b-2 disclosure to ensure they don’t charge separate fees. ADP will often pay an outside advisor’s fees from the revenue sharing they collect, but sometimes they don’t. When they don’t, you’ll need to add the advisor’s fees to ADP’s to total your plan fees.

Step #2 – Total ADP’s direct fees

 “Direct fees” are the most transparent type of 401(k) provider fee. Their dollar amount must be reported in 408b-2 disclosures and reported in 404a-5 (participant) fee disclosures, plan statements, and Form 5500s when paid from plan assets.

To total ADP’s direct fees, you just need to multiply the monthly amount reported in the “Direct Compensation Schedule” section of their 408b-2 disclosure by twelve. I found my ADP 401(k) plan example paid $3,291.84 ($274.32*12) annually:

Step #3 – Total ADP’s revenue sharing payments

Revenue sharing is much less transparent than direct fees. It can be estimated in 408b-2 disclosures, buried in the fund expense ratios of 404a-5 disclosures, and disregarded altogether in plan statements or Form 5500s. This lack of transparency makes revenue sharing payments easy to overlook.

However, overlooking the revenue sharing paid to ADP by your 401(k) plan would be a mistake because it reduces participant returns just like direct fees – which means you have a fiduciary responsibility to keep it in check too.

To total ADP’s revenue sharing, you must convert the revenue sharing percentages disclosed in your 408b-2 to a dollar amount. Below are the steps I take to do it:

• Enter the current balance for all plan investments into a spreadsheet.
• Using the “ADP Investment Fund Expense and Compensation Disclosure,” enter the revenue sharing percentages (“Total Paid to ADP” column) applicable to each fund.
• Multiply each fund’s balance by its revenue sharing percentage to determine the dollar amount the fund pays ADP in revenue sharing.
• Sum the revenue sharing paid by all plan funds

Using a spreadsheet, I found my ADP 401(k) plan example paid $3,094.28 in revenue sharing annually:

Don’t overlook revenue sharing when evaluating your 401(k) plan fees!

When I added the direct fees and revenue sharing paid by my ADP example, I found the plan paid $6,386.12 in total fees – $3,291.84 in direct fees and $3,094.28 in revenue sharing. However, that’s not the end of the story.  Because ADP’s revenue sharing payments are based on a percentage of assets, their dollar amount will grow quickly – more than doubling by the time the plan hits $1 million in assets.

If your ADP 401(k) plan pays revenue sharing, you overlook look these 401(k) fees at your peril – because they can easily result in excessive fees – especially as your plan grows. While it’s possible to total these fees, the ADP 408b-2 disclosure doesn’t make this job easy. Too much trouble? I’ve got a simple solution. Replace ADP with a 401(k) provider that charges 100% direct fees. There’s a good chance you’ll reduce your total plan fees in the bargain!