Should Employers Pay 401(K) Fees or Pass Them On To Employees?

When companies consider offering a retirement savings plan to employees, the most common selected is the 401(k) retirement plan. This type of savings account is the most typical form of an employer-sponsored plan and is one that most people are familiar.

In today’s blog post, we’re examining the fee structures surrounding 401(k) plans and best practices for companies. We’re looking into how fees are structured and managed in a way that provides both an excellent service to employees and highlights the importance of benchmarking your retirement plan costs.

The 401(k) Retirement Savings Plan
Before diving into the fee structures associated with retirement plans, let’s first review the 401(k) process. The Internal Revenue Service (IRS) describes the 401(k) plan as a defined contribution retirement plan that allows employees to use a portion of their salary as either pre-tax pay or ROTH contributions to invest in an interest-bearing account. This account will be held tax-free until the money is withdrawn, ideally at the age of 59½ in order to avoid paying a 10% early withdrawal fee. 401(k) plans are typically sponsored by employers and allow companies to match employee contributions up to a set limit. These employer contributions are also generally considered a tax deduction for companies at the end of the year.

401(k) Fee Structures
Contrary to popular belief – 401(k) plans are not free.  Each plan has layers of cost.  Some costs are borne by the employer, while other costs are shared with the employees.  Examples of retirement plan costs include:

  • Recordkeeping
  • Investment Management
  • Advisory Fees
  • Annual administration
  • Individual service fees

Each cost is in exchange for a product or service.  

Now depending on the size of your company, average account balance, total assets, and other contributing factors, this will determine your overall plan costs.  These costs are variable and fluctuate based on your specific plan features. However, it is very important to be aware of your plan costs and benchmark what your plan is paying compared to your peer category.  One way that we can help you is to complete a Fee Benchmarking Report and show you your plan fees side-by-side with your peers.  

As a general price comparison, a good benchmark to remember is small employers pay around a 1.4% yearly operating fee, midsize companies can expect to pay a 0.85% fee and larger companies a 0.5% fee. Please cite your source.  This does not seem to align with our industry experience.  When you say operating, do you mean recordkeeping?

However, there are also other factors that contribute to how much an employer and employee will end up paying for a 401(k) plan. Factors like class shares, for example, account for a significant portion of fee fluctuations.  

Another best practice is to contact your Service Provider every three to five years and ask for a price evaluation. Many times the Service Provider will reprice and lower your plan fees.

So, Should Employers Pass Fees on to Employers?
While there is no one answer for every company and every situation, generally we advise employers think about what makes sense for their company.  Here are a few suggestions to consider:

 

  • Tax Ramifications. By covering certain 401(k) plan fees and offering matching contributions to employees, employers become eligible for several tax deductions. These deductions can prove more useful financially to the company than the cost of the fees. For your specific situation be sure to consult a financial advisor and your accountant for more information. Examples of fees could include: Annual TPA Fees, Advisory Fees, Statement Fees, Recordkeeper Fees.
  • 401(k) plans are a great benefit option to offer employers. The better benefits, the better chance of hiring the right talent for your position. Finding the right people to work with you to build your company is vital.
  • Employee Participation. Lastly, employees don’t want to feel their being taken advantage of, especially in terms of creating a retirement plan that will allow them to be financially stable during retirement. Passing on plan fees may cause less enrollment and participation of the plans, thus making it less effective for employees.

In conclusion, if you’re going to offer a retirement savings plan to employees, you should know your plan costs and what your employees are paying for.  Based on your company, think about what you feel comfortable subsidizing and document what your employees are paying.  Remember at the end of the day, you are offering your employees an opportunity to save for their future.  By offering a competitive retirement plan, you are helping each employee come one step closer to a successful retirement.  

For more specific questions on your individual financial needs, please contact your financial advisor to set up a portfolio review. For more financial information and advice, call: (801) 274-1768 or email info@tnrs.com. We look forward to continuing to assist you on your financial journey.

TrueNorth Retirement Services is a financial and wealth management firm specializing in personalized financial guidance to local individuals and businesses. For a free financial consultation, please call: (801) 274-1768 or email info@tnrs.com.