401(k) Fees - Is Your "Free" 401(k) Going to Cost You More Than You Can Imagine?

The retirement plan industry has for years been operated with no standard way that fees are charged, collected, or even reported. Because of this, it has become very difficult to evaluate an arrangement and the fees that are being paid for it.

In order to get as close as possible to an "apples to apples" comparison of fees we have to first look at the different types of fees that can be charged.

1. Plan Administration Fees - These are fees for providing plan administration services for the plan. This covers compliance and reporting issues as well as statements and participant services.
2. Individual Service Fees - These are fees for things like loans, or distributions. They are charge to the participant using specific services that are offered for a fee.
3. Investment Fees - These are fees that go to the investment management companies and financial advisors. These pay for the management of the investments in the plan and the advisor that helps you and your participants decide where to invest. The fees to the investment management company are usually in the form of expense ratios in the mutual fund companies/insurance companies. The fees to the financial advisor can come directly from the plan, the business, or the mutual fund company in exchange for selling their funds.

All three of these fees have to be paid in some fashion. The Individual Service Fees are generally pretty straightforward. They are generally spelled out in terms of "$75 per distribution" so they do not warrant much discussion here.

The Plan Administration Fees and Investment Fees tend to intermingle more often for the purposes of marketing. By saying, "Your Plan Administration is free," it makes a plan sponsor see a good deal. The problem is these arrangement generally hid much higher fees for investment management than is necessary. Generally one would pay much more in this situation than they would pay in a situation in which each fee is spelled out.

The question is, "Does any of this really make a difference?" Just recently General Dynamics realized it does matter when their free plan cause d fees o their participants that were unfair. They recently settled a class-action lawsuit filed by their participants for $15.15 million dollars. This says nothing about what it also cost them in terms of employee satisfaction. When a group of employees are suing their company I can't imagine they have great employee longevity.

So what should you do about it? Review your plan to find out how much your plan is paying for all these services. If your plan is paying an unreasonable amount (usually more than 1.5-2%) you should check into if you can get a more appropriate deal. If you don't know how to review the fees in total you should consult a professional. When choosing a professional you should be careful that it is one that is entirely independent and has no vested interest in the fees you plan pays and from where. You must find an outside consultant that is not currently related to your plan.