WRITING SAMPLES : Articles From HRO Today, April 2004 Controlling 401(k) Plan Cost By Scott Peterson Small costs can still have a significant impact on plan balances. Here's how to protect your employees' nest eggs. With the recent inquiry into mutual fund practices, 401(k) fees — and the total cost of 401(k) plans — are under great scrutiny. At a high level, total plan cost is the sum of all costs paid by the employer and employees to operate a defined contribution plan. If not monitored closely, total 401(k) plan cost could be more than you realize, affecting your employees' retirement earnings by hundreds of thousands of dollars over time. A 401(k) plan's total cost includes investment management, administration, and trustee costs. Investment management fees can account for approximately 60 to 85 percent of total plan cost and go toward the expense of the investment manager running the fund. Administrative costs make up approximately 15 to 25 percent of total plan cost and include recordkeeping, call centers, and print communication. Trustee costs make up 5 to 10 percent, and include fees for records processing, securities transactions, net asset value calculations, etc. When trustee and administration costs are bundled into investment management fees, you're probably paying little or no out-of-pocket expenses for your plan. You might mistakenly assume that you're getting something for free — or that the plan costs must be low. The fact is that your employees are responsible for paying investment management fees from their own plan assets — as much as 2.5 percent of the portfolio balance. Since these fees are asset-based (i.e. a percentage of total assets invested in the fund) and no one receives a bill, there is a tendency to overlook them — especially when the market was delivering rates of return of up to 20 to 30 percent. What you and your employees may not fully realize, however, is that as 401(k) assets grow over time, so does the total plan cost. For example, an employee 30 years from retirement with a 401(k) plan balance of $50,000 and fees of 0.5 percent would have about $437,748 when he or she reached retirement age, assuming an annual return rate of 8 percent. If that same employee was paying total plan costs of 1.5 percent, he or she would have an ending balance of only $330,718 — a difference of more than $107,000 or 25 percent. Obviously, certain plan costs are necessary to run and operate a 401(k) plan, but employers have a fiduciary responsibility to monitor plan expenses on employees' behalf — a responsibility the Department of Labor (DOL) takes very seriously. As an employer, it's important to know the total plan costs associated with the plan and to be able to respond to employee inquiries and concerns. To gain control over total plan cost, it's important that you understand all of the costs associated with your current plan and how those costs affect your employees. Here are some things you can do: Make sure that total plan costs are on your periodic fiduciary checklist. Create a paper trail to show the DOL that you have kept a careful eye on fees. Begin an in-company evaluation of fee disclosure. Make a commitment to keep all fees, especially fund fees, low. Institutional funds cost less than retail funds, sometimes significantly less. When calculating total plan cost, remember to include projections for future asset growth and participant growth. Upon gaining a full understanding of the fees associated with their plans, some companies opt to change providers, with the goal of reducing total plan cost and increasing value delivered to employees through the plan. In selecting a provider, investment fees are one of the aspects over which you have the greatest amount of control. While there are a number of elements that go into selecting a fund, fees should definitely play a role in this decision. Savings of even 0.25 or 0.5 percent can lead to relatively large dividends in the long run, and studies have shown that low-cost funds actually outperform high cost funds over time. Keep in mind that even small costs have a significant impact on retirement plan balances over time, and monitoring all fees from a total plan cost perspective could help protect employees' nest eggs for retirement. Scott Peterson is Global Business Leader, Retirement Outsourcing Services for Hewitt Associates. Back to Top