The Employee Retirement Income Security Act holds fiduciaries of 401(k) plans responsible for protecting plan assets.
To fulfill that requirement, fiduciaries must ensure that plan expenses, including investment-related expenses, are reasonable in light of the services provided.
Typically, investment expenses make up a lions share of a plans fees. Plan providers often cover the cost of the expenses by deducting a percentage of plan assets directly from the plan investment options.
Plan providers often collect investment-based fees by deducting the fees from funds net asset values, rather than by allocating charges to individual participants accounts. Investment-based pricing can reduce the anxiety of inexperienced investors who are suspicious even of bargain-basement fees.
Unfortunately, in some cases, retirement plan providers may not give fiduciaries much more detail than they give employees.
To carry out their fiduciary duties, plan sponsors should evaluate the brokers, trustees, auditors and other service providers paid from plan assets.
Fiduciaries should look at contracts for information about services and fees, and also ask whether the provider receives any other revenue. Note that the day-to-day contact at the service provider might not know if additional income is being generated from plan assets.
Plan sponsors also must determine whether the fees paid are reasonable.
The retail rate for plan administration services, for example, ranges from $75 to $200 per participant annually, depending on the complexity and size of the plan. Expressed as an asset-based fee, the typical plan administration fee range is 0.5% to 2%, including investment management fees. Of course, fees might be lower for large plans and higher for very small plans.
Doug Conkel is a benefits consultant in the Dallas office of Milliman.
Reproduced from National Underwriter Edition, April 15, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.