While an employer-sponsored retirement plan provides you a valuable benefit, not all retirement plans may be beneficial to you. According to Deloitte’s 2019 Define Contribution Plan Survey, about 57% of retirement plans have plan fees deducted directly from the participant account either on a pro-rata or flat-dollar amount basis. This means less money is working towards your retirement.
Your employer, as a fiduciary for the plan, has the responsibility of finding the most cost-effective service providers for the plan. Even with proper due diligence, the employer still may end up selecting high-cost providers, unknowingly. Sometimes, high fees are purposely buried within plan’s offerings by the service providers. These fees come in a couple of different forms.
There are investment fees, which include investment advisor fees and expense ratios charged by the fund company. These fees are generally charged based on a percentage of assets under management. In the same 2019 Deloitte Survey, the average weighted expense ratio was 0.50% (50 bps) for 75% of the plans surveyed.
Then there are also administrative fees, such as Third-Party Administrator (TPA), Recordkeeper, and Custodial fees. Also charged based on a percentage of assets under management. The industry average is around 1.67% (167 bps).
Often, you will see investment advisory and administrative services provided by the same company. If your current plan is managed by American Funds, JP Morgan, John Hancock, Mass Mutual, or Voya (to name a few), then it is highly likely that your plan does not have the most cost-effective provider. It may appear that these companies charge a low fee or do not charge a fee at all, but that is certainly not the case. They generally create proprietary fund lineups that charge high commissions and engage in revenue share that goes directly into their pockets. In 2019, 33% of the plan sponsors had all of the Recordkeeping fees paid directly through investment revenue.
Most employers provide a retirement plan as a benefit to employees by offering profit sharing and contribution matches. The more generous employers even pay investment and administrative fees. If these fees are paid by you, the participant, you owe it to yourself to further research the fees and investments offered through the plan. If you are not happy with what your plan offers, have your employer or plan administrator contact us.
We created a retirement plan platform that offers low-cost no-commission institutional class funds from companies, such as Vanguard and Dimensional that do not engage in revenue sharing. Our advisory fee structure is a flat-dollar based with the option to have fees paid outside of participant accounts.