Quick Summary
ERISA requires 401(k) fees to be reasonable for the services provided, not the lowest available. Fee benchmarking compares your plan's recordkeeping, administration, investment, and advisory costs with data on similar plans. Many plans benchmark every year or two and run a full request for proposals every several years. Whatever the result, documenting the review is a key part of meeting fiduciary duties.
Ask a business owner what their 401(k) plan costs, and the answer is often a pause followed by "I'm not sure." That is understandable. Plan fees are spread across several providers, expressed in different ways, and often deducted from accounts rather than paid by invoice.
But as a plan fiduciary, you are responsible for making sure those fees are reasonable. Not the lowest available. Reasonable, for the services your plan receives. Fee benchmarking is how you find out.
Where the duty comes from
ERISA requires fiduciaries to act prudently and solely in the interest of participants, and to use plan assets only to provide benefits and pay reasonable plan expenses.
Two disclosure rules give you the information to do that:
- 408(b)(2) disclosures require covered service providers to tell plan sponsors what services they provide and how they are paid, directly and indirectly.
- 404a-5 disclosures require plans to give participants information about plan and investment fees each year.
The disclosures tell you what you are paying. Benchmarking tells you how that compares.
The fees to look at
A complete picture usually includes:
- Recordkeeping and administration fees for maintaining participant accounts, the website, and statements
- Third-party administration fees for compliance testing, Form 5500 preparation, and plan document services
- Investment management fees, reflected in each fund's expense ratio
- Advisory fees paid to the plan's financial advisor
- Individual service fees for loans, distributions, and domestic relations orders
- Revenue sharing paid from fund expenses to providers
Expressing each fee in dollars, as a percentage of plan assets, and per participant makes them easier to compare.
Reading your 408(b)(2) disclosures
These disclosures can run dozens of pages and are often scattered across documents from different providers. A useful first step is consolidating them into a single summary that shows each provider, each service, and each source of payment. An advisor can usually help with that.
Benchmarking versus a request for proposals
There are two main ways to test your fees.
Benchmarking compares your plan's fees with data on similar plans, matched by factors such as plan assets, number of participants, average account balance, and services included. It is relatively quick and does not require going to market.
A request for proposals (RFP) asks several providers to bid on your plan. It takes more work, but it produces actual quotes for your specific plan.
Many plans benchmark every year or two and conduct a full RFP every several years, or sooner if something changes.
What "reasonable" means
Reasonable fees are judged in light of the services received. A plan that receives more services, such as a 3(38) investment manager, extensive participant education, or 3(16) administrative support, may reasonably pay more than a bare-bones plan.
You are not required to choose the cheapest provider. You are required to understand what you are paying for and to make a prudent decision about it.
What to do with the results
Benchmarking leads to one of a few outcomes:
- Fees are within a reasonable range. Document the review and the conclusion.
- Fees look high. Start by talking with current providers. Many are willing to adjust pricing when shown benchmarking data, especially as plans grow.
- Investment costs look high. Review share classes and ask whether lower-cost share classes or collective investment trusts are available.
- Negotiation does not resolve it. Consider an RFP.
Whatever the outcome, record what you reviewed, what you concluded, and why.
Do not forget participant-paid fees
Fees deducted from participant accounts deserve the same attention as fees the company pays directly. Because they are less visible, they can grow unnoticed. When you benchmark, include every fee paid from plan assets, not just the invoices that cross your desk.
Triggers for another look
Even if your last review was recent, some events call for a fresh one:
- Significant growth in plan assets, since asset-based fees rise automatically
- A meaningful change in the number of participants
- A provider changing its services or pricing
- Several years passing since the last review
Why documentation matters
Lawsuits over 401(k) fees once targeted mainly very large plans. In recent years, smaller plans have been named as well. A documented, regular review process is a clear way to show that fiduciaries took their responsibility seriously.
Want a second look at your plan's fees? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm meets with business owners to benchmark plan fees and review providers. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.
Frequently asked questions
How often should we benchmark our 401(k) fees?
Many plans review fees annually and conduct a more formal benchmarking study every few years, with an RFP when circumstances call for one.
Can we just compare our fees with another company's plan?
A single comparison is not a benchmark. Plans differ in size, services, and participant demographics, so meaningful comparisons rely on data from many similar plans.
Who pays for fee benchmarking?
It is often included in a plan advisor's services. Ask your advisor whether benchmarking is part of your current agreement.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.