While 401(k)s are a fantastic employer benefit, the unfortunate reality is that they are often riddled with fees that are difficult to understand. As an employer, it’s important to know what you and your employees are paying, and to benchmark your plan to know if you’re overpaying. 401(k) management fees may seem impossible to figure out, but they can be broken down into a few key categories. If you are trying to demystify your current fee disclosure, read up on the categories you should be familiar with below.
|## **Fee Categories**|
|**401(k) Management Fee**||**How is it Charged?**||**Who Typically Pays?**|
|Custodial Fee||% of assets||Employees|
|Fund Expenses||% of assets||Employers|
|Advisory Fee||% of assets||Varies|
Recordkeeper (or “Platform”) Fees
Your recordkeeper is the entity that tracks the different sources of money in your plan. They often act as the plan administrator as well, generating notices for your plan, reporting, etc. Insofar as 401(k) management fees are concerned, the recordkeeper will usually have a flat fee (often called a base or platform fee), coupled with a per participant fee. These administrative costs are most often paid for by the plan sponsor.
Custodial fees are charged by (you guessed it) the plan’s custodian. These costs are sometimes outlined as part of the recordkeeping fees, but may also be listed completely separately. In most cases, the custodial fee will be an asset-based fee, meaning that it is charged a percentage of the plan assets. Unlike the recordkeeping fees, these are usually paid for by the plan participants, directly out of their account balance.
If your plan does not use a “bundled” solution where the recordkeeper acts as an administrator, then your plan will use a third party administrator (TPA). TPA fees are generally based on the number of participants in your plan. They can either be paid for by the employer or passed on to employees as a percent of assets invested.
While fund fees may not necessarily fall into the category of a 401(k) management fee, every 401(k) has them so we thought it would make sense to touch on this in our post. Each fund offered in the 401(k) line-up will have an associated expense ratio. This is something that you should pay close attention to, as some funds have additional fees built in, such as commissions and kickbacks (also known as 12b-1 fees) to fund managers or advisors, which can increase the expense ratios unnecessarily.
If you have an investment advisor on your plan to choose the fund line-up, complete advisory sessions, etc. then you are also paying an advisory fee. This is sometimes charged as a per participant fee, but most often is an asset-based fee (like the custodial fees) that participants pay for out of their plan balance.