Compare recordkeeping, advisory and investment expenses in annual dollars. Include service scope, fee offsets, who pays and transition costs.
August 19, 2024 · Financial Forte Staff
Historical article: prepared retrospectively using information available as of August 19, 2024.
Two retirement-plan proposals can quote different prices for services that are not actually the same. One may list a simple annual administration fee while another combines recordkeeping, advisory support and investment costs. Choosing the smaller headline number can leave the employer comparing only part of the expense.
Build a total-cost comparison using the same plan, participant count, asset value and service scope. For an ERISA-covered plan, the fiduciary question concerns reasonable expenses for the services provided and a prudent selection and monitoring process. It is not an instruction to select the cheapest provider regardless of what the plan needs.[1]
Separate the layers before adding them
Identify recordkeeping and administration charges, investment advisory fees and the expenses of the investments themselves. Ask about transaction charges, participant-paid fees, termination or conversion costs and services billed separately. A fee that does not appear on the employer's invoice may still affect participants.
Determine how each charge is calculated. It may be a fixed amount, a charge per participant, a percentage of assets or a combination. Check whether an asset-based fee changes as the plan grows and whether a fixed fee covers the full service being compared.
Revenue sharing and other indirect compensation can complicate the picture. Ask how the provider is paid, whether amounts are credited against another fee and whether the quoted total counts the same compensation twice. The service provider's fee disclosures should support the explanation, not be replaced by a verbal claim that the service is free.[1]
Then compare the actual responsibilities. Does the proposal include the employer support, employee education, investment services and administrative work the plan requires? Ask which duties remain with the employer and which appointments the provider accepts. A lower price for a narrower role is a different offer.
Put both proposals into annual dollars
Here is a hypothetical comparison for a plan with $3 million of assets and 60 participants. Proposal A charges $6,000 annually for recordkeeping, $50 per participant and an advisory fee of 0.30% of assets. Assume the weighted investment expense is 0.20% and is additional to those charges.
At those fixed assumptions, the participant charge is $3,000, the advisory fee is $9,000 and the investment expense is $6,000. Total annual cost is $24,000. The estimate assumes no offsets, other charges or changes in asset values during the year.
Proposal B quotes $9,000 for recordkeeping, no separate per-participant charge, a 0.25% advisory fee and a 0.15% weighted investment expense. Those amounts are $9,000, $7,500 and $4,500, totaling $21,000 on the same asset base. The apparent difference is $3,000 annually, or $250 monthly at the same assumptions.
Before calling B the better value, confirm the service scope and transition cost. Suppose moving to B would cost $4,000 once. The simple recovery period for that cost is sixteen months at a $3,000 annual saving, before other effects, because $4,000 divided by $250 per month is sixteen months. If B also shifts work to HR that costs an estimated $1,000 annually, its comparable ongoing cost becomes $22,000. The saving falls to $2,000, and recovering the $4,000 transition cost takes two years. The employer still needs to compare service quality.
These numbers are invented, not a fee benchmark or an endorsement. A plan with different assets, participants or needs could have a different result. The purpose is to expose what each price includes and give the employer a consistent basis for asking questions.
Ask who pays and what improves
Separate the total cost from its allocation. An employer may pay an expense directly or, where permitted and properly handled, the plan may bear it. Charging participants instead of the business does not make the expense disappear. Consider the applicable rules and the effect on participants before changing who pays.[1]
For the hypothetical plan, a proposal could reduce the employer's invoice while increasing investment expenses paid indirectly by participants. That might appear attractive in the business budget without lowering the plan's overall cost. Review both views before describing a proposal as a saving.
Also identify the service improvement being purchased. Faster resolution of payroll exceptions, clearer participant support or a defined investment responsibility may have value. Ask for the actual commitment and a practical measure, such as unresolved cases beyond the agreed response period. Avoid paying for a list of features that nobody expects to use.
The trade-off can run in either direction. Paying more for a service that reduces work or improves administration may be reasonable. Paying less for a simpler arrangement may fit a plan whose needs are straightforward. The record should explain the choice using the plan's circumstances.
Monitor the agreement after signing
A prudent comparison does not end when the contract is signed. Review invoices, investment expenses, credited compensation and service performance over time. A change in assets, participant count or investment lineup can alter the cost even when the published rate stays the same.[1]
Check whether the same investment share classes and fee offsets used in the proposal appear in the actual arrangement. Assign someone to reconcile the first billing period with the proposal and to investigate differences. For a provider change, track conversion tasks and unresolved participant issues as well as the fee saving. A transition that lowers expense but leaves records incomplete has not completed the business objective.
Two useful measures are total annual cost on a consistent basis and performance against the services the employer actually selected. Record significant changes and the reason for retaining or replacing the provider. Do not infer that a favorable fee comparison eliminates fiduciary risk.
Request a written explanation of every direct and indirect payment, then translate each proposal into the same annual-dollar format. Once the scope, payer and transition costs are visible, the employer can make a better-informed decision about value and maintain a record of how that decision was reached.
Related reading
- Target-Date Funds: What the Plan Committee Should Understand
- A Retirement Plan Review Should Cover More Than Returns
Have more questions about retirement plan fees and provider value? Email Dave at dave@financialforte.com to discuss your questions and next steps.
The contact invitation is current; it does not imply this contact path existed on the historical reference date.
Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.
