Whether it’s Bob Clark, my colleague over at ThinkAdvisor who recently opined on what 401(k) plans should cost, or a certain law professional at a deep blue school, who recently threatened to expose plan sponsors who pay “high” fees, the subject of 401(k) fees, strangely dormant since the advent of 408(b)(2) last summer, has erupted with a frenzy this summer. Through all this bickering, though, no one has stood up and identified the real issue with 401(k) fees. 

Until now. 

It’s not the high cost of regulation, as one of Clark’s readers mentioned, although there certainly is a cost to regulation. It’s not service providers who gouge their clients, although, without a strictly enforced fiduciary rule, the possibility certainly exists for this to happen. It’s not naïve plan sponsors duped into believing they can get a 401(k) plan “for free,” although you definitely don’t have to be naïve to be duped. 

No, as explained in “What is an Appropriate Fee That a 401(k) Plan Should Pay?” (FiduciaryNews.com, Aug. 6, 2013), the real issue amounts to simple math – and there’s very little anyone can do about it.

It comes down to the law of numbers, specifically, the law of large numbers. Perhaps you can blame regulation, but it doesn’t change matters that much. There are certain base costs, you might call them fixed costs, associated with maintaining a viable 401(k) plan. From a dollar standpoint, these costs are small and, when equally distributed among a great number employees, amount to very little in terms of basis points (the standard measure for 401(k) fees). The trouble occurs when there are not enough employees to spread these costs around. Then the fees are large (again, in terms of basis points).

But that doesn’t make them “high.” They simply represent the cost of doing business, in this case, the 401(k) business. The only way to lower these fees is for plan sponsors to grow their employee count dramatically. Of course, in an era where the regulatory burden of hiring employees is even greater than the regulatory burden of maintaining a 401(k), bringing on more workers is not a practical option.

So, what are small company plan sponsors to do? Well, for one thing, they should consider if there are cheaper retirement savings alternatives to the 401(k) plan. Some have suggested SIMPLE plans. Of course, this may eliminate some of the advantages of 401(k) plans (e.g., company matching, investment education, liability protection, etc…). Perhaps the best alternative – one that maintains the 401(k) framework – is the Multiple Employer Plan. Unfortunately, the pure form of these (i.e., the ones that can achieve true economies-of-scale and reduce real costs) are harder to find since the DOL began enforcing the rules on them last year. The secret, however, is to find that rare business association that offers a MEP. 

Without a true baseline on fees (one won’t exist until the DOL has 401(k) plans report expenses in the same way the SEC requires mutual funds to report their expenses), there’s no way to tell what the right fee is for any particular 401(k) plan. They must be analyzed as but one element (in addition to services, options, etc…) in analyzing the fitness of a plan. 

So, we can argue ‘til the day is done on what is the “right” fee for a 401(k) plan. Just like we can argue how many angels can dance on the head of a pin.