Understanding 401k Recordkeeping Services and Costs
Figuring out what participants are paying retirement plan service providers has long been a source of confusion for plan sponsors. Despite the Department of Labor’s stricter fee disclosure requirements, many sponsors still struggle to fully understand the fees associated with their 401k plans. In fact, some sponsors became less inclined to investigate fees after the disclosure regulations were enacted, assuming that everything was transparent. Unfortunately, this is not always the case. While service providers have always disclosed fees in their agreements and are typically willing to provide further information upon request, it’s still up to plan sponsors to dig deeper into the details.
Breaking Down 401k Fees
If your provider is one like Ascensus or Vanguard, understanding fees can be very straightforward. These providers typically use a simple fee schedule, including a fixed annual fee and a per-participant fee. Any additional fees—such as for plan amendments or participant loans—are clearly spelled out in their service agreements.
However, many providers assess an asset-based fee that bundles recordkeeping, administration, custodial, and advisory fees. While administration and advisory fees may sometimes be disclosed separately, this isn’t always the case. When administration fees are billed separately, plan sponsors often mistakenly believe they are covering all the costs themselves. In reality, the bulk of the fees are typically passed on to participants as an asset charge.
This asset charge can go unnoticed for two reasons: first, it’s deducted from participant accounts rather than being paid at the employer level, and second, plan sponsors don’t receive an itemized bill reflecting these participant fees. This lack of visibility can leave plan sponsors unaware of the full cost burden placed on their employees.
Negotiating Fees
One common misconception among plan sponsors is that 401k fees are fixed and non-negotiable. In truth, most providers are open to negotiating fees, including those for recordkeeping, administration, custodial services, and advisory services. You don’t need to be an expert to negotiate these costs—simply asking for a fee reduction can often yield results.
Plan sponsors can also take this a step further by eliminating advisory fees altogether. Some sponsors worry that removing the advisor violates their fiduciary duty, but in reality, paying an advisor with participants’ money without utilizing their services is a bigger issue. To reduce or eliminate advisory fees, sponsors simply need to contact their recordkeeper and request the change. Once the reduction is approved, all that remains is a form to sign and a notice to send to participants.
Understanding Service Offerings
While cost is a critical factor, service quality and offerings should also play a key role in choosing a provider. Here are a few important considerations:
Fund Selection
Most 401k providers offer a wide range of investment options. However, some, like Guideline, limit fund selection to a curated list of about 40 funds. This can simplify decision-making, as Guideline assumes the fiduciary responsibility for selecting and monitoring these funds. Other providers offer group annuity platforms, which tend to be less expensive but lack the flexibility of true open architecture platforms, which include exchange-traded funds (ETFs).
Many providers also offer a self-directed brokerage account (SDBA) option, allowing participants to choose from thousands of funds through the custodian. However, SDBAs often come with restrictions, such as limiting participants to allocating no more than 50% of their funds into these accounts. Costs for SDBAs can range from $50 to $400 per participant annually, with some providers charging an additional annual fee of up to $500.
Payroll Integration
For businesses that use a large payroll provider, many 401k providers offer 360 payroll integration. This integration automates the flow of payroll data into the 401k system, streamlining the contribution process. This feature becomes especially valuable for companies with frequent payroll periods and a high number of participants.
Unbundled vs. Bundled Services
Some providers offer the option to unbundle your plan by working with a separate third-party administrator (TPA). While bundled providers handle recordkeeping, administration, and custodial services in-house, unbundling allows sponsors to choose a specialized TPA. A good TPA can provide more personalized support, answer detailed questions, and reduce reliance on large providers with inconsistent customer service. While unbundling may come with higher costs, the improved service quality can make it worthwhile.
Service Quality and Flexibility
The quality of service you receive often depends more on the individual representative you work with than on the provider itself. Even providers that assign a dedicated representative may face frequent turnover, meaning you could find yourself speaking with a new person every year. Additionally, representatives often need to refer questions to other departments, which can delay responses and complicate communication.
Simplifying the Process
Understanding 401k fees and services doesn’t have to be an impossible task. By working with an experienced retirement plan advisor, you can gain valuable insights and guidance tailored to your needs. Advisors can help you:
Evaluate fee structures and negotiate reductions
Compare service offerings and investment options
Ensure compliance with Department of Labor regulations
Partnering with the right advisor can save you time, reduce costs, and help you make informed decisions that benefit both your business and your employees.
Choosing the Right 401k Provider
Choosing the right 401k provider requires a balance of cost, service quality, and flexibility. By understanding the fees and services involved and actively engaging with providers, you can create a retirement plan that meets the needs of your employees while keeping costs manageable. Don’t hesitate to ask questions, negotiate terms, and seek expert advice to ensure your plan is optimized for long-term success.