It is interesting to observe how perceptions vary from reality when it comes to 401(k) plan participant retirement account fees. In a survey conducted by Rebalance IRA, they found 46 percent of employed baby boomers believed that they do not pay any retirement account fees at all, 19 percent thought their fees were less than 0.5 percent and only 4 percent of those surveyed believed that they pay more than 2 percent in retirement account fees.1
According to the 401(k) Averages Book, the average American employee has retirement account fees of 1.5 percent deducted each year from their 401(k) account. Even more astonishing is the fact that smaller plans had the highest fees–averaging nearly 2.5 percent, and some plans had fees approaching the 4 percent mark.2
Recognizing the need for greater fee transparency, the Department of Labor’s (DOL) Employee Benefits Security Administration published 404(a)(5) regulation in February of 2012, that required more comprehensive disclosure of the fees contained within qualified retirement plans.
The Employee Retirement Income Security Act of 1974 (ERISA) mandates that fiduciaries of qualified retirement plans “act prudently and solely in the interest of the plan’s participants and beneficiaries.” It further mandates that fiduciaries “must take steps to ensure that participants and beneficiaries are made aware of their rights and responsibilities with respect to managing their individual plan accounts and are provided sufficient information regarding the plan, including its fees and expenses and designated investment alternatives, to make informed decisions about the management of their individual accounts.”3
Regrettably, the 2012 regulation did not go far enough in requiring the disclosure of ALL fees in a qualified retirement plan. As a result, typically what is disclosed to plan participants is the amount of fees paid to the mutual fund companies whose funds are offered inside of the plan. The unfortunate part of the regulation is that there are other fees associated with operating the plan that are oftentimes greater in total than just the mutual fund management fees. These fees include third party administration expenses (for testing, compliance, reporting, etc.), recordkeeping (accounting, participant level reporting, website access, etc.), custodial fees (trading and custody fees) and financial advisory service fees (plan design, participant education, investment advisory services, etc.).
One item to note is that the DOL has not required that plan fees be as low as possible, they require that plan fees be “reasonable.” The difficulty for most plan sponsors, is that they are left to interpret for themselves what “reasonable” means. Fortunately, there are benchmarking tools that can help inform plan fiduciaries as to the reasonableness of the fees they are paying. While it is not required, it is strongly recommended by the DOL that plan fiduciaries undergo a benchmarking analysis of plan fees no less than every three years in order to ensure that their plan’s fees continue to remain reasonable.
If it has been more than three years since you’ve had a benchmarking analysis conducted on your company’s plan, contact Bryan Webster, Carlson Capital Management’s Director of Institutional Client Services, for a complimentary review.
 401ksource.com-2016 401(k) Averages Book, data through 9/30/2015.