ERISA (the Employee Retirement Income Security Act), the federal law governing private-sector retirement plans, requires those responsible for managing retirement plans to carry out their responsibilities prudently and solely in the interest of the plan’s participants and beneficiaries. Called “fiduciaries,” these individuals also have a responsibility to ensure that the services provided to their plan are necessary and their cost is reasonable.
Why Consider Fees?
Fees and expenses can have a substantial cumulative effect on plan participants’ retirement savings. Therefore, understanding and evaluating the fees and expenses associated with retirement plans are an important part of a fiduciary’s responsibility.
A variety of plan fees and expenses may affect your organization’s retirement plan. They generally fall into three categories: administration fees, investment fees and individual service fees.
Plan Administration Fees. These fees cover the plan’s day-to-day operating expenses, such as recordkeeping, accounting, legal and trustee services. This can also include the cost of providing additional services to participants, such as educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation and online transactions.
Some plans deduct the costs of administrative services directly from investment returns.
When administrative costs are billed separately, they may be borne, in whole or in part, by the employer or charged directly against the assets of the plan. In the case of a 401(k), profit sharing, or other similar plan with individual accounts, administrative fees are either allocated among individual accounts in proportion to each account balance (a “pro rata” charge) or passed through as a flat fee against each participant’s account (a “per capita” charge). Generally the more services provided, the higher the fees.
Investment Fees - By far the largest component of plan fees and expenses is associated with managing plan investments. Fees for investment management and other related services generally are assessed as a percentage of assets invested. Employers should pay attention to these fees. They are paid in the form of an indirect charge against the participant’s account or the plan because they are deducted directly from investment returns. Net total return is the return after these fees have been deducted. For this reason, these fees, which are not specifically identified on statements of investments, may not be immediately apparent to employers.
Individual Service Fees - In addition to overall administrative expenses, a plan may charge fees to the accounts of those participants who take advantage of a particular plan feature. For example, a participant may have to pay fees for taking a loan from the plan or for executing participant investment directions.
Fees Associated with the Investment Choices - Apart from administration fees, a plan may charge two basic types of fees in connection with plan investments or investment options made available to participants and beneficiaries. These fees, which can be referred to by different terms, include:
Sales charges (also known as loads or commissions). These are basically transaction costs for buying and selling shares. They may be computed in different ways, depending on the particular investment product.
Management fees (also known as investment advisory fees or account maintenance fees). These are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund.
Funds that are “actively managed” (i.e., funds with an investment adviser who actively researches, monitors and trades the holdings of the fund) generally have higher fees than funds that are “passively managed.” The higher fees are associated with the more active management provided and increased sales charges from the higher level of trading activity. While actively managed funds seek to provide higher returns than the market, neither active management nor higher fees necessarily guarantee higher returns.
Funds that are “passively managed” generally have lower management fees. Passively managed funds seek to obtain the investment results of an established market index, such as the Standard and Poor’s 500, by duplicating the holdings included in the index. Thus, passively managed funds require little research and less trading activity.
Fees and expenses are one of several factors to consider when you select and monitor plan service providers and investments. The level and quality of service and investment risk and return will also affect your decisions. For more information on setting up and administering an employee retirement plan, please contact us.
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