Why Do the IRS and DOL Care About Your 401(k) Fees?

By Chip Logan Senior Wealth Advisor- Retirement Plan Services CLA Email T. 303.265.7888

Key insights

• The federal government established laws to help employees reach financial security in retirement.
• Costs associated with retirement plans can pile up if left unchecked.
• Plan fiduciaries need to review fees to make sure vendors aren’t overcharging.
• Benchmarking and RFPs are good tools for determining if your retirement plan is well priced.

As a business owner or principal in your company, you constantly make financial decisions about your product offering, business location, staffing, and equipment — and in none of these situations does the IRS or Department of Labor (DOL) ask if you’ve reviewed the costs to see if they are appropriate for the value that you are receiving. So why do they care about the fees in your 401(k)?

Retirement plans like 401(k)s and 403(b)s exist because the federal government passed laws that allow tax-advantaged savings for you and your employees. Therefore, the DOL has regulations to make sure that these “products” are appropriately priced to help employees achieve potential financial security in retirement.

Analyze benefit plan costs

Because 401(k)s and 403(b)s are complex, their associated costs can be difficult to analyze. Beyond choosing investment options, benefit plans can require calculations, tracking, user-friendly technology, and employee education. Excessive fees from these products and services can dramatically impact an employee’s ability to reach retirement readiness. Therefore, the DOL requires plan fiduciaries to act solely in the interests of plan participants, and to consider the costs of choosing investment options and selecting service providers.

Your 401(k) plan doesn’t need to be the least expensive or have the best performing investments. But plans are expected to have a process to choose and review service providers to make sure the fees are appropriate for the value received by your employees.

The complexity of retirement plans has enabled some companies to overcharge for their services. Many plans are overpriced because as the assets grow — and summarily the fees — much of the work remains constant. To make sure pricing remains competitive, plan fiduciaries need to review fees as the plan grows. Being fee conscious is one of the easiest ways to help employees achieve their retirement goals.

Find tools to help you understand benefit plan fees

So, given the complexity of 401(k) and 403(b) plan fees, how do you determine if your retirement plan is well priced?

• Benchmarking is the easiest way. There are a number of benchmarking tools that can give you an idea of what the “average” pricing is for a plan roughly the same size as yours. A benchmarking report will also show you common provisions for plans like yours and can provide ideas about how you might improve the value to your employees.
• A request for proposal (RFP) is the most thorough way to analyze the value you are getting for the fees you are paying. With an RFP, you are shopping the market to see what pricing and services are available for a plan like yours.