DO YOU UNDERSTAND YOUR RETIREMENT PLAN FEES?

Conributing Editor: Eddie Bell, CFP, CHFC

(Note from Editor) OK. What's with the funky sunglasses on your editor? Well, thanks to our good friend and blog reader Pat Weeks at CoilPlus Ohio, I lost a bet that if he provided glasses just like Tom Cruise wore in the movie RISKY BUSINESS I'd put them on the blog page. So you win Pat! Now to important stuff.


What does understanding your retirement plan fee structure have to do with business risk? Great question. The answer is this: not knowing about hidden or back end fees risks overspending and under-performance on your plan. As a sponsor of a qualified retirement plan, you are responsible for making many important decisions about the plan’s management. Some of these decisions include selecting a plan service provider, decision-making on how you will select and monitor the investments you will offer to your participants, and what level of educational support your participants will receive. All of these decisions will require you to understand and evaluate the overall cost of your retirement plan. In fact, as a fiduciary of the plan, you have a responsibility to ensure that the costs of the plan are controlled and accounted for. This does not mean that the plan sponsor should choose the least expensive option. In fact, the Department of Labor provides guidance that fees and expenses need to be reasonable in light of the level and quality of services received. Rather, the plan sponsor needs to know what is being charged and whether that charge represents a value to the plan.

The problem with evaluating retirement plan fees is they can be extremely difficult to understand and account for. There are a variety of plan fees and expenses that may affect your retirement plan. We generally classify plan related expenses into two broad categories: Plan Administration Fees and Investment Fees (or Asset Based Fees).

Plan Administration Fees: Plan administration expenses are paid to cover the day-to-day operation of the plan. Some examples of administration expenses include plan recordkeeping, accounting, tax filing, legal and trustee services, loans, distributions, plan document services, and participant statements. Plan administration fees can be netted from plan assets (deducted directly from investment returns) or billed separately.

Investment Fees: In most instances, these are by far the largest component of plan fees and expenses and also the most difficult to account for. Some examples of investment fees include the following:

1. Mutual Fund Expenses - Mutual funds charge expenses associated with their ongoing management and distribution.

2. Investment Advisory Fees - These are ongoing charges for the management of the plan (participant education, investment consulting, etc).

3. Insurance-Related Charges - Insurance companies frequently offer a range of investment alternatives for plans through group variable annuity contracts. Insurance Related Charges include items such as sales expenses, mortality risk charges, the cost of administering contracts, surrender and transfer charges. Insurance-Related Charges are typically expressed as a percentage of plan assets and deducted directly from plan investment performance.

How can you determine what fees you’re paying? Consider an annual audit report by your plan administrator of expenses. To see an example of an actual audit report, link to http://consolidated-ins.com/images/stories/docs/blog%20excel%20asset%20fees%20illustration.pdf

Please contact us if you would like us to do a complimentary analysis of the fees charged under your retirement plan.