Author: Paul A. Carl, CHSA, CPFA™ Vice President, Retirement Plan Consulting, Registered Representative
Retirement Meditation #28 identified the primary service providers and their roles for participant-directed retirement plans. This Retirement Meditation looks at how the providers charge for the services.
Post 2012 (the DOL issued comprehensive fee regulations in 2012), a plan sponsor searching for a new retirement advisor identified each of its 401(k) plan service providers. When the prospective advisor asked about fees paid to each, the plan sponsor replied, “The only plan fee is $800 and it's paid annually to the TPA.” Following the DOL’s fee guidance, the retirement industry has greatly clarified its fees and fee calculations. While disclosures and notices are now required that should clearly articulate fees and how they are assessed, confusion among plan sponsor fiduciaries still abounds.
Here’s a summary of how explicit fees may be assessed by providers.
- Recordkeeper – Often recordkeepers quote their fees as basis points (100 basis points = 1%) of plan asset market value. Some quote fees using a base fee and per participant formula. Still others combine the basis points, base and per participant. The quote depends on a variety of factors and most recordkeepers includes plan asset size and participant count in their formulas. Nearly all recordkeepers will also include per event fees, such as for distribution processing.
- Custodian – Third party custodians most often charge a fee of basis points on asset market value. Custodians affiliated with recordkeepers often have their fee embedded in the recordkeeper’s total pricing quote.
- Third party administrator – Most TPAs will charge a base fee plus a per participant fee. Sometimes the per participant fee is based on all eligible whether or not actively contributing, and sometimes the per participant fee is based on only those who have account balance activity. Some TPAs assess an annual document compliance fee and do not bill separately for plan amendments and the plan restatements (whether required by the IRS or directed by the plan sponsor). Others will invoice for each plan amendment and plan restatement. Nearly all charge for per event fees, such as distribution or participant loan processing.
- Investment advisor – Some investment advisors receive commission and some are fee-based. Commission-based advisors normally receive compensation through the plan investments – such as through 12b-1. Commissions could also be in the form of a load, which is a percentage taken at the beginning of the investment or the end of the investment. (My personal experience: It’s very rare that I encounter a corporate retirement plan using an investment share class that carries a load.) Fee-based advisors are generally regarded as preferable from a best practices perspective. Fee-based advisors may charge a basis points fee on total asset market value, a flat fee, or a combination. Any investment advisor acting as an ERISA 3(21) co-fiduciary or as an ERISA 3(38) fiduciary will be fee-based.
What are your plan’s explicit fees?
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