401k Plan Fee Reductions are on the Horizon as Ancillary Costs Become More Visible
401k Plan Fee Reductions have been occurring in recent years as retirement plan vendors made a land grab for their share of the DC plan market. However, to date, those 401(k) Plan Fee Reductions have applied mostly to costs for core services, such as administration and recordkeeping. If they haven’t already, sponsors may soon experience higher 401(k) and 403(b) plan fees for “extras” such as plan distributions or loans, that only occasionally impact a portion of participants.
Workplace retirement plans expert, 401(k) consultant, Rick Unser made a compelling argument in Forbes recently that sponsors may soon see retirement plan vendors adopt a fee structure that mirrors the sweeping changes airlines adopted around a decade ago. He points out, that in the past you received a whole lot of services and experiences for the price of an airline ticket. But times have changed. While plane tickets themselves are still relatively inexpensive, you pay a fee for just about every add-on over and above your seat itself. You now see a line-item fee to check your bag, get more leg room, use priority boarding, etc. When it comes to airlines, there’s no free lunch — literally.
Unser points out that the same may soon hold true for retirement plan providers. Vendors, too, are changing their 401k and 403b plan fee models to charge for “specialty” services as 401(k) plan fee reductions capture the headlines. Unser mentions distribution fees as an example; those costs are increasing by as much as $75 or more as providers bid on new business or reprice their current client plans. The same goes for 401k loan initiation fees. Once free or around $25, those costs are also going up. As Unser notes, it’s oddly reminiscent of checked bag or priority boarding fees for airlines. The same goes for on-site meetings. Retirement plan providers used to host those for free, while core 401k plan fee reductions get the press, many firms have begun charging for meetings. The fee today can be as high as $2,000 a day!
Plan design features such as automatic enrollment and automatic contribution increases have helped to mitigate some of the need for on-site enrollment and education meetings and these standard design features have contributed to 401k plan fee reductions. And the widespread use of target date funds has helped remove the stress of choosing their own investments for millions of participants. These features have notably boosted participation and savings rates — improving retirement readiness overall. As such, recent changes to retirement plan design have been particularly beneficial, according to Unser. Maybe that means sponsors can consider foregoing the huge price tag for on-site meetings. It’s a thought.
Here’s the key takeaway for plan sponsors: keep in mind, your fiduciary duty under ERISA is to make sure your plan fees are reasonable, and that you’re getting the best value for your plan dollars. As such, as 401(k) and 403(b) plan fees fluctuate it’s important to keep tabs on all of your plan costs. Plan fiduciaries must ensure not only that fees do not become excessive, but that the services you are receiving are delivering true value for your plan and participants. It’s a good idea to evaluate and/or benchmark your plan providers and related fees annually. In addition, consider conducting requests for proposal (RFPs) as necessary to ensure you’re fulfilling your fiduciary duty. Make certain that your 403b and 401k plan fee reductions are reducing your overall plan costs and that your plan-related expenses are serving the best interests of your participants.
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