Determining the bottom-line cost to your 401(k) or profit-sharing plan should be as easy as comparing price tags in a supermarket, but it's not. Hundreds of companies offer retirement plan services, each with different methods for calculating fees. Though some pricing formulas are straightforward, many are not. The apples & oranges of retirement plan pricing makes direct comparison between programs difficult at best. In fact, many people find it so confusing that they simply give up and rely on salespersons' assurances of a good deal.
To make a well-informed decision, you should identify the different layers of fees that you are paying for your plan. A few minutes of due diligence can save your firm thousands of dollars in expenses.Operating fee categories Many plan sponsors are under the impression that the bill they receive for recordkeeping services represents the total cost of running their plan. This is rarely the case. In fact, this bill often covers only a small portion of total fees. Generally, fees for operating a retirement plan fall into three categories. To determine your plan's total expenses all of these fees should be considered:
• Direct-billed fees: These fees are the most easily identified. This is the bill you receive periodically for recordkeeping and associated administrative services. This fee is normally a flat fee plus a per-employee charge.• Activity-based fees: These are fixed fees based on variable levels of activity in your plan. Specifically, you may have a loan initiation charge of $50 and a distribution charge of $25. Your cost is determined by how many of these activities occur in your plan during the year.• Asset-based fees: These are the more difficult charges to determine and often make up the majority of total plan expenses. Money management fees normally fall into this category. However, other charges are often included in asset-based fees. These charges can include marketing charges (12b-1 fees), commissions, insurance fees, and other charges. All fees combined result in a total asset-based fee – often referred to as the total expense ratio. To determine the real dollar expense, multiply your plan assets by the total expense ratio. Asset-based fees are often overlooked because nobody ever gets a bill for these services. Effectively, the participants pay these fees by receiving a lesser return on their investments.
Another twist on the fee issue is the flexibility allowed to billing. Some fees are billed to the firm; some to the participant and others can be shifted to either party. To draw a fair comparison, focus first on the total fees and second on who pays them. Why? The plans total expense allows you to see how much a service provider is earning from servicing your plan, this in-turn allows you to make reasonable judgements about their service package. Remember, that while the total charge may be split to different sources, in the end your firm and employees are paying it all. The bottom line: read the fine print
All fees charged must be appropriately disclosed. Normally the fees will be detailed within the investment prospectus, annuity contract or services agreement. You may need to read the fine print, but it will be time well spent.
By adding all fees together and focusing on your total expenses it becomes easier to compare your plan to competitive offerings. While it is not always wise to choose the lowest-cost option, it is wise to be a well-informed consumer. Because, sometimes you get what you pay for, and sometimes you don't.
For a fee-calculation worksheet, please call the ABA Members Retirement Program at (800) 826-8901.
Gregory Long ([e-mail glong]
) is a vice president with CitiStreet and marketing director of the ABA Members Retirement Program. The ABA Members Retirement Program provides retirement services to more than 4,700 law firms nationwide.This article was previously published in the April 2001 issue of Law Practice Management, volume 27, number 3 by Gregory Long. Copyright © 2001 by the American Bar Association. Reprinted by permission of the American Bar Association.