It can help you attract and retain good employees, as well as provide potential tax advantages for your practice. However, there are costs associated with these plans, so it’s important to understand the fees and expenses that come along with them.
Considerable attention has been given to plan fees in the past year, with a goal of making them more transparent and more easily understood by plan participants. Fees have been the subject of several Congressional Hearings, Government Accountability Office (GAO) reports, and regulatory initiatives.
Employers today have a variety of options for how to implement a workplace savings plan. These affect the types of fees and expenses the plan will incur. Although employers traditionally managed these plans in-house with the help of an external trustee, that model has become outdated. Today, two of three employers outsource 401(k) administration functions to a service provider.(1)
Roles and responsibilities
In terms of obligations that can arise in offering a 401(k) plan, both the plan sponsor and service provider have distinct roles and responsibilities.
The plan sponsor has fiduciary obligations under the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that covers retirement, health and other welfare benefit plans. For example, the sponsor must carefully select and monitor its service provider to ensure that the fees and expenses are reasonable and fair. Sponsors don’t have to choose the lowest cost plan, but they must ensure that costs are reasonable. The Department of Labor (DOL) has noted that the cheapest provider may not necessarily be the best.
The service provider must offer accurate record-keeping and administrative services that can help plan sponsors minimize risk and produce measurable results. All of this can help plan sponsors enhance the value of this benefit for the plan participants. Of course, service providers must be able to maintain a reasonable profit margin, which can help them finance ongoing innovation in products and services and stay competitive in the market.
The plan participants have the responsibility to use the plan as it is intended—to save and invest for retirement. That means making well-informed decisions on how much to save, which funds to choose, and how often to make changes. Participants should understand that there are fees associated with 401(k) plans and they should have a working knowledge of those fees.
Bundled or unbundled?
Two basic service models have emerged in the workplace savings market: bundled and unbundled offerings. Traditionally, plan sponsors have contracted with separate parties for these services. In this “unbundled” service model, they may have distinct relationships with a record-keeper, trustee, adviser/broker, and third-party administrators. Unbundled providers tend to have a complex fee structure, which may include:
- Administration fees–can be charged as a per-participant fee, a flat rate or a transaction-based fee.
- Asset-based fees (often referred to as the “expense ratio”)–they are not deducted directly from the participants’ plan accounts. Instead, they are typically paid by the investment option and result in a reduction in the investment return.
Other fees include sales loads, 12b-1 fees and wrap fees, which may or may not be charged by some mutual funds, brokerages and investment programs.
Alternatively, the use of “bundled” service providers has become more common over time—they currently serve about 75 percent of plans. They offer one-stop shopping for all aspects of retirement plan administration, including record-keeping services, trustee services, and brokerage/investment management. Most bundled providers have a simple fee structure, which includes administration fees and asset-based fees.
Putting fees in context
Workplace savings plans are hardly unique in having costs or charging fees for the financial services they provide. All savings vehicles have administrative costs. Banks, insurers, mutual funds, and brokerage houses charge customers for their services. Bank customers are familiar with ATM fees, low-balance fees, check writing fees, overdraft fees, and monthly maintenance fees. Similarly, an investor might incur mutual fund fees in connection with transactions as well as regular fund operating costs.
As important as it is to have competitive and equitable fees for your savings plan, it’s equally important for those fees to be disclosed clearly and provided in a meaningful context. Disclosure of fees shouldn’t be considered in isolation, but rather within the framework of ”full disclosure” of a fund’s investment objectives, including risk levels, past performance, and tax consequences. After all, what should matter most to participants investing in workplace savings plans is the potential total return they may receive—after fees.
So what does this mean?
If you are the fiduciary responsible for managing your practice’s employee benefit plan and its assets, it’s critically important to stay informed. One way is to work with a reputable service provider to help you evaluate your plan annually and then make changes if necessary.
To learn more about the long-term impact fees can have on a 401(k) plan, contact Fidelity Investments at 866-467-0633 for a no obligation review of your plan. A plan review with a Fidelity Representative can help you learn how your plan is working— and considerations to help make it better.
Henry Schein has made Fidelity Investments—one of the nation’s leading retirement service companies—a preferred provider of workplace retirement products and services. Fidelity now offers Henry Schein customers a 401(k) plan with discounted pricing.
Visit www.Fidelity401kForYourPractice.com for more information.
The DOL offers brochures to help participants and plan sponsors to better understand the fees associated with a 401(k) plan.
They can be found at: http://www.dol.gov/ebsa/publications/401k_employee.html and http://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html.
Available only to U.S. dental practitioners.
Henry Schein and Fidelity Investments are independent entities and are not legally affiliated.
There are many kinds of workplace retirement plans. When determining which plan may be appropriate for your practice, you should consider all relevant factors including, but not limited to, contribution types and limits, ease of administration, investment options, initial costs and ongoing costs.
Neither Henry Schein, Inc. nor any of its affiliates are a registered broker-dealer under the federal securities laws. The Fidelity retirement plan products offered under this discount program are offered by Fidelity Brokerage Services LLC, Member NYSE, SIPC, 100 Summer Street, Boston, MA 02110. 491965.1.0