A Primer on Retirement Plan Fees

Since we work on retirement plans day in and day out, sometimes we forget that many plan sponsors don’t have a basic understanding of the fees your retirement plan should pay.  We’re sorry about that – our bad!

Unfortunately, if you are like most smaller employers, you may not know how you should be paying for fees.  Here is a quick primer on what your plan should be pay.  We break it down into three categories:

MUTUAL FUNDS.  These are the investment options in your plan.  Their fees are known as expense ratios and can range from .05% to maybe 2%.  Big range, right? (If you are using insurance accounts, stop it – get rid of them).  Bond funds are typically less than stock funds.  Index funds should be less than actively managed funds.  International funds are typically more than domestic funds.

The fund expenses are deducted from your employees’ accounts.  We think you should use mostly passive index funds from Vanguard.  If you do, the cost will probably average .12%.  This means that for each $10,000 an employee invests, they will pay $12 a year.

RECORD KEEPING.  This is the cost to run your plan.  Record keeping is the engine of your plan.  Your record keeper processes the payroll, handles distributions, generates your Form 5500, handles plan testing, provides your plan document, etc… Sometimes this is also known as TPA work.  (Some organizations have a separate TPA, but this work is generally lumped together in most cases.  We don’t think you need a separate TPA for your plan unless it is complex or weird).  Also, the plan’s trust services are typically part of a record keeper’s service.  When you add all of the record keeping fees together (except for the trust services – which should be between .05 and .10 bp), you should be able to easily calculate this as an annual fee.

This should be paid as a flat fee.  It is typically paid quarterly.  You can have your employees pay it and have it deducted from their accounts or you can choose to pay it directly.

ADVICE.  Your organization probably needs help running your retirement plan. And your employees probably need help too. The firm providing advice to your plan will help you decide the best type of plan for your company, the investments for your lineup, how to establish an Investment Committee and an Investment Policy Statement, how to educate your staff, etc..

Just as the record keeping fee, it should be a flat fee (not a percentage fee!).  It is typically paid quarterly.  You can have your employees pay it and have it deducted from their accounts or you can choose to pay it directly.

THAT’S IT!  These should be the categories of fees you pay.  Record keeping might be the most difficult to figure out, but you should be able to determine what it is with a little research and assistance.


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