November 11, 2024

Employers May Be Overpaying Retirement Plan Fees

A recent analysis by Abernathy Daley 401(k) Consultants suggests that around 80% of companies with more than 100 employees may be overpaying on administrative fees for the defined contribution (DC) retirement plans. This finding, based on a review of over 6,500 Form 5500 filings submitted annually to the Department of Labor and IRS, highlights a widespread issue across industries. For plan sponsors, administrative fees are just one component of total plan costs, but they are critical to evaluate regularly. Managing all plan fees effectively is a fiduciary duty that directly impacts the financial health of the company and the quality of employees’ retirement savings. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Understanding Types of Plan Fees

Retirement plans typically include multiple types of fees that sponsors should manage carefully. Here’s a breakdown of the main types of plan fees and why each matters for cost management and compliance:

• Administrative Fees – Administrative fees cover essential services for the day-to-day operation of the plan, including recordkeeping, compliance, customer service, plan communications, and regulatory filings. These fees are typically charged as a flat rate or a percentage of plan assets. Since Abernathy Daley’s report suggests companies paying over 3% of total assets in administrative costs may be overpaying, regular review of these fees is key to ensuring cost-effectiveness.
• Investment Fees – Investment fees are associated with the funds and investment options available within the plan. They are often the largest component of plan costs and are expressed as an expense ratio — a percentage of assets invested. While actively managed funds tend to have higher fees than passive index funds, reviewing the investment lineup can help sponsors identify and reduce unnecessary costs.
• Individual Service Fees – Individual service fees apply when participants use specific services or request transactions, such as taking a loan, processing a distribution, or requesting certain reports. These fees are typically passed on directly to the participant and can vary widely among providers.

The Risks of Excessive Fees

Overpaying on any type of retirement plan fee has consequences for both employees and plan sponsors. Excessive fees reduce the net returns on employees’ retirement savings, slowing the growth of their accounts. For employees contributing to a 401(k) or 403(b) over several decades, even a small percentage difference in fees can significantly impact the total balance at retirement. Participants who unknowingly bear these higher costs may end up with less income, potentially delaying retirement plans.

From a compliance standpoint, plan sponsors have a fiduciary responsibility to ensure that all fees are fair and reasonable. Failing to manage fees effectively can lead to legal action. A 2020 report by Aon found that at least 85 excessive fee lawsuits were filed in U.S. courts, marking a fourfold increase over previous years. This uptick in litigation reflects a growing awareness of fiduciary obligations around fee management.

Recent high-profile cases illustrate the consequences of excessive fees. In 2023, General Electric paid $61 million to settle a lawsuit that claimed the company’s limited fund choices resulted in high fees for participants. Similarly, Cornell University is facing a lawsuit, currently before the U.S. Supreme Court, where employees allege that the university failed to control administration fees in its 403(b) plan, raising costs for participants. These cases emphasize the substantial financial and reputational risks for plan sponsors.

Practical Steps to Manage Plan Fees

Plan sponsors can take several proactive steps to manage retirement plan fees, protect employees’ savings, and ensure regulatory compliance. Here are key actions to consider:

1. Benchmark Fees Regularly – One of the most effective ways to manage retirement plan fees is through regular benchmarking. Reviewing Form 5500 filings from similar-sized organizations can provide a basic comparison, while third-party benchmarking services offer a more detailed analysis. These services can assess costs across categories like recordkeeping, compliance, and investment management, providing insights into areas of potential overpayment. Regular benchmarking ensures that fees align with market rates and helps identify potential savings.
2. Conduct Periodic Requests for Proposal (RFPs) – Issuing an RFP to several service providers every few years allows plan sponsors to obtain competitive quotes for services like plan administration and recordkeeping. This process helps sponsors stay aware of current market rates and avoid overpaying. According to recent data, 5% of firms have not conducted an RFP in the past four years, which can leave them locked into outdated contracts with higher fees. Testing the market periodically can secure more favorable terms.
3. Evaluate Investment Options – Investment fees can make up a large portion of total plan costs, especially if the plan includes a range of actively managed funds. Reviewing the investment lineup and offering more cost-effective options allows sponsors to provide high-quality choices at lower costs. Regularly evaluating investment options complements other fee management efforts, creating a well-rounded, cost-effective plan.
4. Consult a Fiduciary Advisor – Working with a fiduciary advisor offers valuable oversight to ensure fees across all categories are reasonable and aligned with participants’ best interests. Fiduciary advisors are legally obligated to act in the best interest of plan participants, which includes identifying opportunities to reduce fees and ensuring regulatory compliance. Advisors also help sponsors select cost-effective service providers and structure efficient administrative services, adding a layer of protection.
5. Educate Employees on Fee Impact – Providing transparent information about fees improves employees’ understanding of how costs impact savings. Plan sponsors can hold group sessions or offer one-on-one meetings with financial educators to help employees make informed decisions. When employees understand the costs associated with the retirement plan, they are more likely to maximize their savings and feel supported in their retirement planning.

Contact Us

Effective management of all retirement plan fees, especially costly administrative fees, means meeting fiduciary obligations, supporting employee financial wellness, and reducing compliance risks. If you have questions about the information outlined above or need assistance with your next retirement plan audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.