A “Rosetta Stone” for Finding 401(k) Provider Fees

401(k) fees paid from plan assets reduce participant returns dollar-for-dollar. These lost earnings can dramatically erode a 401(k) account account balance over time, so employers have a fiduciary responsibility to pay only “reasonable” fees – so excess fees do not reduce participant returns needlessly. To evaluate the reasonableness of their 401(k) fees, employers must benchmark them – basically, compare the administration and investment fees charged by their 401(k) provider to the fees charged by competing 401(k) providers. I recommend employers do so on an “all-in” basis.

Benchmarking 401(k) fees on an all-in basis involves summing a 401(k) provider’s administration and investment fees into a single (all-in) fee and then comparing that total to the all-in fee of competing providers. 401(k) provider services and investments can vary dramatically in terms of breadth, depth, and price. Benchmarking 401(k) fees on an all-in basis helps normalize these differences – putting the onus on a 401(k) provider to justify higher fees.

Need help calculating your 401(k) plan’s all-in fee? Below is the 3-step process I use when comparing our fees to competitors, including where I find the administration and investment fees for ten leading 401(k) providers. In short, a Rosetta Stone for finding 401(k) fees.

Step 1 – Identify all plan service providers

The first step in calculating an all-in 401(k) fee is to identify all plan service providers - because they’re not working for free.

All 401(k) plans require three basic administration services - asset custody, participant recordkeeping, and Third-Party Administration (TPA). These necessary services can be delivered by either a “bundled” or “unbundled” provider:

• “Bundled” providers - deliver all three administration services.
• “Unbundled” providers – deliver some, but not all, of them. Most often, an unbundled provider delivers asset custody and participant recordkeeping services - while an unrelated company delivers TPA services.

A financial advisor can be added to a bundled or unbundled provider for professional 401(k) investment advice.

Once you have identified your plan’s service providers, you’re ready to start looking for their fees. A “Covered Service Provider” (CSP) must disclose their fees in a 408b-2 disclosure, while other service providers generally disclose their fees in a services agreement.

Step 2 – Determine if your 401(k) plan pays “hidden” fees

401(k) service providers can be paid fees from three sources today – the employer, participant accounts or plan investments. 401(k) fees paid by the employer or deducted from participant accounts are considered “direct” fees, while fees paid by plan investments are considered “indirect” fees.

• Direct fees are the most transparent. Their dollar amount must be explicitly reported in 408b-2 and 404a-5 fee disclosures, participant statements and invoices.
• Indirect fees are a different story. They can be buried in the investment expense ratios of 408b-2 404a-5 disclosures, and not appear at all in participant statements or invoices. For these reasons, indirect fees are often called “hidden” 401(k) fees. They come in two basic forms:
  • Revenue sharing - Revenue sharing is the practice of adding non-investment related fees to the operating expenses of a mutual fund. These additional fees then compensate a plan service provider. There are two general forms:
    • 12b-1 fees – usually compensate a broker or insurance agent.
    • Sub-Transfer Agency (sub-TA) fees – usually compensate a recordkeeper.
  • “Wrap” fees – Insurance companies often use variable annuities instead of mutual funds as 401(k) investments. A variable annuity is basically a mutual fund wrapped in a thin layer of insurance with additional fees and redemption restrictions. The additional fees usually include a “wrap” fee that can increase the expense ratio of the underlying mutual fund dramatically. Sometimes by more than 1%!

Both direct and indirect fees reduce participant investment returns dollar-for-dollar, so employers have a fiduciary responsibility to keep their total in check.

The problem? Because indirect fees lack the transparency of direct fees, they’re easier to overlook. Their dollar amount is also more difficult to calculate.

Step 3 – Calculate your all-in 401(k) fee

At this point, you’re ready to calculate your 401(k) plan’s all-in fee. If your 401(k) plan pays no indirect fees to any service provider, you are lucky – this calculation will be a piece of cake. You just need to add the direct fees to your plan’s fund expenses. To do that, I recommend using a spreadsheet

If your 401(k) plan pays indirect fees, you have more work to do. Using your spreadsheet, you must break out the indirect fees from fund expenses. Service providers that receive indirect fees are almost always considered a CSP – which means they’ll have a 408b-2 disclosure. 408b-2s usually disclose the indirect fees paid by an investment fund as a percentage of assets. To calculate the dollar amount paid by each fund, you must multiply the fund’s current balance by the percentage.

A completed all-in fee calculation for a 401(k) plan that pays both direct and indirect fees can be found here.

Where to find leading 401(k) provider fees

In our 2018 small business 401(k) fee study, we found the most expensive 401(k) providers – generally insurance companies – charged the most layered and opaque fees. I think the takeaway from this finding is clear - the harder a 401(k) provider makes calculating their all-in fee, the more important it is for employers to calculate it.

Don’t know where to find to 401(k) provider’s fees? The below table can help. It includes where to find the direct and indirect fees for 10 leading 401(k) providers.

Cost is the starting point when 401(k) benchmarking!

I like benchmarking 401(k) fees on an all-in basis because the approach helps normalize the dramatically different services and investments a 401(k) provider can offer today. Employers have no obligation to choose the lowest-cost 401(k) provider, but they should only pay higher fees for more valuable services and investments. For example, paying a financial advisor can be money well-spent when they help plan participants save and invest more appropriately for retirement – something that many fiduciary-grade advisors excel at.

Still unclear how to calculate your 401(k) plan’s all-in fee? Call your 401(k) provider. If they can’t tell your plan’s all-in fee, you’re probably paying too much.