Upon sponsoring a retirement plan as an employee benefit, your client takes on the legal responsibility of a fiduciary. The Employee Retirement Income Security Act (ERISA) spells out a number of responsibilities that come along with being a fiduciary. One of them is to ensure that the services provided to the plan are necessary and the costs of such services are reasonable.
There are a lot of costs and fees associated with retirement plans. As a trusted financial advisor, you need to make sure that your clients understand all of the fees involved in their company’s retirement plan so that they can fulfill their fiduciary duty.
Types Of Plan Fees and Expenses
There are three main categories of fees and expenses related to retirement plans. This is what they are and how they are commonly paid:
Plan Administration Fees
It takes a lot to administer a retirement plan. Day-to-day operations include recordkeeping, accounting, legal support, and trustee services, to name a few. All of these tasks are necessary to administer the plan as a whole, and none of them are free. There is a cost involved.
With a 401(k) or profit sharing plan, there may be even more services that must be paid for. Educational seminars, access to a customer service representative, telephone voice response systems, retirement planning software, electronic access to plan information, daily valuation, online transactions, and investment advice are all services that your client might want for their employees. Often, the more services provided, the higher the administration fees will be.
Sometimes, the cost of plan administration is deducted directly from investment accounts with the investment fees. When they are billed separately, either the employer can pay them or pass them on to the plan participants. When the expenses are passed on, it can either be done as a flat fee for all participants or in proportion to the account balances, so that those with higher balances pay more.
Individual Service Fees
Sometimes, retirement plans with individual accounts, such as 401(k) plans, will have individual service fees associated with optional services. Optional services include things such as loans against the plan or personally directed investments. Since these fees are only incurred by specific plan participants, they would be charged directly to their accounts and not pooled.
Investment Fees
The major costs related to retirement plans come from managing plan investments. These fees are usually paid as a percentage of invested assets.
It is very important to understand investment fees, because not only are they usually the biggest expense, but they are also the least obvious. Since they are deducted directly from investment returns, they do not show up on statements as clearly as direct charges do. Also, being taken directly from investment returns, they have a great impact on net returns.
It is important that you help your client recognize and evaluate their investment fees. Without your training and experience, they may have a difficult time finding the correct information and understanding how it impacts their plan participants. You need to make sure they understand these two kinds of investment fees:
Sales Charges/Loads/Commissions
These are the transaction costs for buying and selling shares and funds. Different investment products compute these fees in different ways, so your clients will most likely rely on you to decipher them.
Management Fees/Investment Advisory Fees/Account Maintenance Fees
These are the ongoing charges for managing the assets of the investment fund. These are usually charged as a percentage of assets invested and can include administrative fees as well. You will need to help your client determine what this fee covers and whether or not it is reasonable.
There is a wide variance in management fee levels. The more management, research, and monitoring required, the higher the fees will be. However, higher fees are not always indicative of better performance. That is a common misunderstanding that you will need to protect your clients against.
How I Can Help
If evaluating the fees for their retirement plans is too big a task for your clients, I can help. As a pension specialist, I have extensive experience with the various fees and expenses that come along with retirement plans. Email me today at info@ff401k.com to discuss how I can help your clients fulfill their fiduciary duty.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.