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Understanding 401(k) fees and expenses

Clarifying confusing retirement plan costs

A lay of the land

We'll begin by sorting out the two main types of costs you'll see in retirement plans and where they arise. Then, a bit later, we'll talk about some of the ways these costs are hidden.

Plan Expenses

Three important roles within a 401(k) plan are the custodian, third-party administrator and record keeper. These roles charge the plan (a plan expense), which is usually paid by the plan sponsor (the business). These expenses tend to be fixed as administrative services don't increase proportionally with plan assets. Essentially, these are service charges, which pay for necessary administrative work.

Asset-based Fees

Furthermore, there are the roles of the advisor and investment manager, along with the actual funds themselves. These three components of the plan tend to be associated with asset-based fees or charges based on the amount of money in the plan. In other words, fees are usually not fixed like expenses. They grow as the plan grows. Moreover, these are usually paid by the plan participants, as opposed to the sponsor.

Now the picture gets blurry

These two categories of costs seem pretty straightforward. And they are, or at least until one entity takes on multiple roles. For example, a big institutional 401(k) provider might be the custodian, the third-party administrator, the advisor, the record keeper and the investment manager. For all this, they might say, "We'll drop out our asset-based fees, and you'll just see a single, low expense." On the outside this looks great. You've bundled and saved. But, what about the funds that big institution is selected for the plan? What if a portion those fund fees got kicked back to said institution? If that were happening, the institution might be incentivized to put you in funds with high kick-backs instead of suggesting the most optimal funds. In this case, sure, you're fixed expenses are low, but the bulk of your costs will grow as the plan grows. We see this sort of situation all the time.

Another issue we see, with insurance companies most commonly, is administrative fees which are tied to the total number of assets within the plan. Instead of fixing these costs, they, once again, grow as the plan grows. Worse yet, it's unusual to see the fee schedule taper over time. Fee structures such as these might make sense with really small plans, but it usually isn't long before this arrangement doesn't suit plan participants.

Skyline has a solution

1

Fix plan expenses

We know where to go. There are a number of platforms providing plan support at a fixed price. The larger your plan, the better these options become. We'll compare to non-fixed options, but more often than not, setting a cap on these charges is most efficient.
2

Taper our fees

Advise shouldn't increase in proportion to plan assets. We don't pretend a ten million dollar plan is ten times more difficult than a one million dollar plan. We taper our fees as assets increase. See more here.
3

Minimize fund fees

Fund quality and costs aren't correlated. In fact, it's the opposite. The highest quality funds we know of are some of the cheapest. The reason for this is simple: fees and performance are linked. Remember, 1% can make a huge difference over time.