Part III: 401(k) Hidden Fees – Top 5 Administration Fees
In the first 2 parts of our 401(k) hidden fees series, we addressed all the fees that can be involved regarding the investment side of a 401(k) plan. However, there are also 401(k) hidden fees that exist regarding the administration of the plan. Not only that, if your plan includes an annuity feature, in addition to these fees you may also be subjected to surrender charges and M&E expenses as well as management fees of the sub accounts. The top 6 administration fees that can eat into a plan participant’s retirement savings are as follows:
9. Recordkeeping Fees-It’s pretty much exactly as it sounds. It’s the cost of keeping account records. The record keeper keeps track of the plan. This can range from the daily valuation of the plan to participant tracking to allowing participants’ access to their account online. This fee can be paid by the plan sponsor or the participant.
10. Custodian Fees-The custodian is the firm that is responsible for holding the assets of the plan. The fee is charged by the brokerage firm or institution for safekeeping services. This provides the investor with a safe place for assets to be held. These costs are paid by the participant and taken right from the retirement account.
11. Third Party Administration Fees-TPAs, as they are most commonly referred to, are responsible for compliance testing, plan design and ensuring the plan is valid under IRS rules. They are responsible for filing the form 5500 for a 401(k) retirement plan. Many employee benefit plans have highly technical aspects and difficult administration that can make using a specialized entity such as a TPA more cost effective than doing the same processing in house. However these fees can become excessive if revenue sharing comes into play. They can also be referred to as contract administration fees. Again, this fee can be paid by the plan sponsor or can be passed on to the participant.
12. Plan document filing/ set up, conversion costs-These costs are incurred annually when the plan files taxes. Also, the costs of setting a plan up or converting from another provider will be included here as well. Depending on the plan sponsor, they may incur the costs or pass the costs on to the plan participant.
13. Trustee service costs-Plans that have a trustee will incur trust service costs. A recent study done by the Trust Advisors Blogsite shows that trust fees are headed higher and even the most basic, no-frills account can be $3000 a year. That’s for a plan with roughly $500,000 and very few participants.
In closing, there can be several 401k hidden fees associated with the administration of a plan. The top 6 are:
- Recordkeeping
- Custodian
- Third party administration
- Plan document filing/set-up
- Trustee services
TPA and recordkeeping costs can become excessive if they are calculated as a percentage of assets under management. You then end up paying more fees for the same exact services based solely on an increase in account value. A way to monitor any and all fees and keep them low is to ensure they are separate, and fully disclosed and transparent. The most efficient way to accomplish this is by setting up an “ERISA budget account” or a “401(k) expense recapture account”.
About Charles Massimo
Recognized as industry expert and guest speaker at national industry conferences, Charles Massimo is a published author and media subject expert on topics ranging from wealth/asset management to investment and financial planning for high net worth families.