It’s All in the Details: How Fees Affect Your Company-Sponsored Plan

With more than $11.1 trillion held in defined contribution plans like 401(k)s and 403(b)s, according to the most recent figures available from the Investment Company Institute, it’s clear that more and more Americans are building their retirement savings strategy around employer-sponsored plans. And as a plan sponsor, you probably already know how valuable a competitive, well-administered company retirement plan is for attracting and retaining the best and most dedicated employees.

But there are lots of details associated with your plan, and as a fiduciary, you have an obligation to make sure your plan is delivering appropriate value to all its participants. That means you can’t afford to cede all oversight of the plan to someone else; you need to maintain awareness of the plan, its ongoing administration, and its effectiveness for those who are investing their life savings in it.

One of the areas that plan sponsors need to focus on is the fees being paid by the plan. After all, money paid out in fees isn’t available to accumulate for the benefit of participants, so controlling fees is a principal way to not only exercise fiduciary responsibility on behalf of your employees but also improve the plan’s performance as a savings vehicle.

In fact, employers paid some $900 billion in 2017 to settle ERISA class-action lawsuits, the majority of which alleged excessive fees paid by workplace retirement plans. Clearly, keeping a close watch on the fees being paid by your company plan is in your best interest.

There are three basic types of fees incurred by employer-sponsored plans:

1. Plan administration fees, which are the costs incurred for day-to-day services such as recordkeeping, accounting, legal, and trustee services;
2. Investment fees, which are typically the lion’s share of expenses borne by the plan, covering the management of investments offered by the plan (typically charged as a percentage of assets invested);
3. Individual service fees, usually associated with particular options offered in the plan, such as loans or specialized investment directions, and charged to the individual participants utilizing the options.

One of your fiduciary duties is to inform plan participants of the fees being paid by providing a prospectus that is updated annually. This seems obvious, but the fact is that most plan participants aren’t receiving effective communication around plan fees. A recent TD Ameritrade survey of 401(k) participants found that only 27% of investors knew what they were paying in fees, and 37% didn’t even realize they were paying fees.

Consider the impact of a difference of just 1% in fees paid over the life of a participant’s deposits into a company plan. Suppose an employee has 35 years to retirement and a $25,000 balance in a 401(k) plan. If the employee earns an average annual return of 7%, makes no additional deposits, and the plan assesses fees that total 0.5%, the employee will have $227,000 at retirement. But if the plan’s fees total 1.5%, the employee will have only $163,000 at retirement—a 28% reduction in available funds.

How can you know if your plan’s fees are reasonable? By periodically benchmarking your provider’s fees with other providers and comparisons with industry averages, you can employ what the Department of Labor terms “an objective process” for determining the reasonableness of your plan’s fees.

At Savant, we specialize in working with clients to develop plans that reduce fiduciary risk and minimize administrative burdens. To learn more, click here to read our article, “Coloring inside the Lines: Compliance Testing Basics for 401(k) Plans.”

SOURCES:

1. Investment Company Institute, “401K Resource Center,”
2. Eric Droblyen, “A Simple Guide for Meeting 401(k) Fiduciary Responsibilities,” EmployeeFiduciary.com, February 8, 2023
3. Seyfarth & Shaw, 14th Annual Workplace Class Action Litigation Report
4. Troy Segal, “401(k) Fees: Everything You Need to Know,” Investopedia.com, February 22, 2021,
5. U.S. Department of Labor, “A Look at 401(k) Plan Fees”
6. Eric Droblyen, “Are Your 401(k) Fees Reasonable? Benchmark Them to Find Out,” EmployeeFiduciary.com, December 28, 2022

Patricia L. Hutchinson Director of Retirement Plan Services MBA

Patty has been involved in the financial services industry since 2006. She earned a bachelor of science degree in marketing and management from Northern State University in Aberdeen, SD, and an MBA from Colorado Technical University, Sioux Falls, SD.