Do Participants See Fees Eroding Their Retirement Savings? Can we talk about something nobody wants to talk about, but we all need to talk about? Fees. Yes, fees. As in retirement plan fees. They’re necessary. And nobody wants to pay them. But somebody has to foot the bill. And if your participants are paying them, guess what? They think fees suck, and they’re probably, to use a kind word, annoyed that they have to pay them (if they’re paying attention).
Despite all the discussion, ballyhoo even, about transparency around retirement plan fees in the past few years within the context of the DOL fiduciary rule, this recent article from the San Antonio Express-News aptly notes that the costs of participating in an employer-sponsored retirement plan are, in many cases, still somewhat hidden. And they’re expensive, as author Michael Taylor points out, even though there has been, in his words, a “revolution” in lowering the costs of fund management fees over the past decade. Employees are still paying WAY too much in management fees, Taylor opines.
Beyond that, employees are paying plan sponsor service fees, which are being siphoned directly from their account balances. Typically, plan sponsors services are offered to employers for free. But someone has to absorb that cost and it’s usually plan participants. And that comes at a cost to their retirement.
Here’s the thing: we know plan sponsors don’t work for free, and we don’t expect you to. Your job is challenging, and it comes with a metric ton of responsibility and fiduciary liability. But if you’re passing the cost of your services on to employees, as illustrated by Taylor in the example below, you may be short-changing their retirement. Plan participants could see it that way and are likely to find it annoying (there’s that word again) at the very least.
Taylor writes that he recently consulted for a 401(a) plan in Texas. Here’s how the employer fees broke down in his example:
“The plan sponsor for their 401(a) plan, a professional and reputable non-profit, charges no money directly to the public entity. Which, again, sounds nice at first.
Employees, however, always pay 0.55 percent in extra fees dedicated to the plan sponsor, in management fund costs, on top of their regular fund management fees, which are somewhat high, to begin with. Enrollment in this retirement plan is mandatory, as employees are ineligible for Social Security and no longer eligible to enroll in a pension. Employees, in other words, are captive to paying significantly higher fees with their retirement money than they otherwise would pay outside of their retirement accounts.
What is the effect of this 0.55 percent that employees pay rather than employers? Employees of this public entity have approximately $14 million under management, meaning the plan sponsor earns $77,000 per year for their 0.55 percent fees on funds charged to employees. That’s the one-year cost.”
Taylor goes on to extrapolate how those fees grow over time as the funds grow, amounting, eventually, to $5.5 million over the course of 30 years. Now, here’s the real issue: those fees are charged from the account balances, so participants’ savings end up growing more slowly. So according to Taylor’s math: “The funds grow to a value $11.6 million less over 30 years than they would have if these fees were paid from outside the accounts. The real ‘cost’ of the fees — as measured by this slower growth — is therefore nearly twice the amount paid to the sponsor, by my reckoning.” Ouch.
Now, we’ve already established fees are a necessary evil. There’s no getting around that, and everyone needs to get paid for their services. Fine. But as Taylor points out, having those fees be paid from the retirement plan account balances unequivocally hinders the growth of workers’ retirement savings. And as he puts it, “… it seems contrary to the spirit of a retirement benefit program that all costs are borne by employees.”
So if you’re a plan sponsor or responsible for overseeing the management of an employer-sponsored retirement plan, first, consider really tuning in and listening to your employees who ask about fees. What are they asking? Why are they asking? What can you do about it? How can you help them grow their savings and improve their retirement outcomes?
Also, here’s a proactive way you can respond, one that can absolutely make a difference in how much participants in your plan can save for retirement over time: consider paying plan sponsor fees at the employer level. As Taylor writes: “…it’s the right thing to do.”
That’s a conversation worth having. It’s certainly a conversation that, as an industry, we SHOULD be having.
