Workplace retirement plans such as the 401(k) have a lot of moving parts. You might not recognize that fact, because the firms that oversee these plans make it all appear seamless. But if you read one of those “fee disclosure” statements that show up about once a year, you may be surprised to see how many people and firms are involved.
This isn’t necessarily a bad thing, but it’s something that someone should be managing.
Reading through your “Participant Fee Disclosure,” you’ll see a host of services listed, including recordkeeping, custodial, broker or advisor, tax, and audit. Each one costs you something in the form of fees charged against accounts in the plan.
Again, this isn’t necessarily a bad thing. Many services are necessary and even required by law. However, some fees might be there for no good reason, and it’s entirely possible that the fees could be lowered. Left unchallenged, excessive or unnecessary fees can directly affect when you can retire and the lifestyle you can afford in retirement.
The importance of reasonable fees
There’s a trade-off when it comes to fee negotiations. Your employer wants (or, if it’s paying attention, should want) the highest possible level of service for the lowest possible price. Every once in a while, it should be addressing each provider of services to your plan to re-evaluate the services and the fees. Why? Because most providers are paid based on the size of the plan. This means that as the total value of the plan grows, they make more money. If this fact is ignored for long, they end up making significantly more money for doing the same work.
Without getting into the details of how fee negotiations take place, let’s talk about their impact on your retirement readiness.
No one will argue that lower fees have anything other than a positive benefit to you and others saving for retirement in the plan. All other things being equal, lowering plan-servicing fees can reduce the time you’ll need to work (and save) to retire successfully. This doesn’t mean everything should be as cheap as possible; it simply means that whatever fees you pay should be reasonably in line with the services the plan receives.
So, what if your employer doesn’t care enough to gauge the plan’s fees, or doesn’t have the knowledge needed to affect the plan in a good way? This happens sometimes. A prime example: retirement plans that are “sold direct.” This means that a big company, usually a mutual fund or insurance company, offers to run all components of the plan. The provider bundles all of the services together, reduces its own costs wherever possible and charges as much as it can get away with. It’s unlikely someone arm-wrestles them over the fees they charge. This often results in years’ worth of extra charges on employees’ accounts might have been waived had there been an effective negotiation. Providers also often load plans with their in-house proprietary products and services, which make them even more money.
Bad bundles are no bargain
To the untrained eye, these “bundled” providers might seem like a bargain— until you discover that they often charge a fee to manage their own investment products, which have fees themselves, and then sell other things to employees and tack on various additional charges.
We came across a very good example of this recently when we helped a plan that was being charged a fee on all assets (which the provider dropped when pressed). Most of the investments in the plan were the provider’s own offerings; plus, the provider was defaulting employees into its proprietary target date funds and charging anyone who wanted extra help an additional 1% fee. There were other layers of fees as well.
Bundled plans are not all bad, but it’s always good to question how objective and fair they’re being with you. Find out whether the fees you’re paying are reasonable, and fight for the best possible suite of services you can get.
Also look closely at your plan’s advisor. Running workplace retirement plans is tricky business, and a very specialized financial discipline. If the company owner’s personal stockbroker is also your plan advisor, someone at your company should question this relationship. If an insurance agent or someone at your company’s bank is also your plan advisor, the chances are good that you do not have an objective advocate in your corner.
Overwhelmingly, employers take their duty seriously, focusing entirely on putting together the best plan they can. More and more companies are even discovering that this approach helps them in a number of long-term ways as well. For example, a company’s health care costs can be lowered when its employees can retire at a normal age, rather than working years longer to make up for the savings drained away by excessive fees.
Some employers don’t care as much. They might simply allow the plan to be parked somewhere convenient and not pay attention to the fees.
If you go your entire career without a solid advocate in your corner, you should expect to have to work extra years to make up for the difference. Unfortunately, where your 401(k) plan is concerned, there’s no do-over. You’ll be exactly as successful as that combination of all those years of saving provide for.