Nearly 80% of corporate retirement plans with 100 or more employees are overpaying on 401(k) and 403(b) plan administrative fees, finds new research—a result of not conducting regular compliance-related benchmarking of their retirement plans, opening the door to compliance risks.
“Without benchmarking, overspending often goes unnoticed, which increases the likelihood of compliance failures.”
Matthew Daley, Abernathy-Daley
The research, released Oct. 24 from Abernathy Daley 401(k) Consultants, a New York-based consultancy in 401(k) plan administration and employee education, is based on an in-depth analysis of Form 5500 filings. Of the 6,566 companies with more than 100 employees reviewed, 5,241 reported administrative costs greater than the most efficient baseline costs broadly available.
“Our proprietary analysis of a vast swath of Form 5500 data clearly indicates a majority of companies are likely overpaying what’s necessary for plan administration fees,” said Steven Abernathy, CEO of Abernathy-Daley.
The data indicates that many companies are likely not benefiting from an independent benchmark of their corporate retirement plans, failing to capitalize on fee reductions over the last three years.
“The discrepancy between what companies are paying and the more affordable options available is striking. Our interviews and reviews of nearly two dozen companies confirm that a lack of third-party benchmarking is a key contributor,” added Matthew Daley, president of Abernathy-Daley. “Without benchmarking, overspending often goes unnoticed, which increases the likelihood of compliance failures.”
Frequently identified compliance risks include:
- Non-compliance with Employee Retirement Income Security Act (ERISA) reporting requirements mandated by the U.S. Department of Labor, which require 401(k) plans to provide clear disclosures on fees and investment options. Employers found to be overcharging employees may face penalties, lawsuits, or other legal repercussions.
- Improperly designed and/or implemented plans, most often associated with profit-sharing-related components of retirement plans.
- Misalignment with internal governance regarding eligibility to participate or contribute to plans based on full or part-time employment.
- Failures to properly reconcile alternative plan structures, such as Cash Balance Plans, which involve complex compliance testing.
Best practices for fee management
Retirement plan administrative fee pricing is a combination of both the number of employees and asset totals. According to Abernathy-Daley, if a corporate 401(k) plan is paying over 0.3% for administrative costs based on the total assets in the plan, the organization is likely overpaying by tens of thousands to hundreds of thousands of dollars, dependent on the total assets.
According to Investopedia, 401(k) plan fees typically range from 0.5% to 2%, but can vary greatly, depending on the size of the employer’s 401(k) plan, the number of participants, and the plan provider. Other factors influencing administrative fees can include level of service, technology provided, and investment options available.
Abernathy-Daley says recommendations for course correction include ensuring retirement plan benchmarking is conducted annually by a third party acting as a legal fiduciary.
“HR leaders, CFOs, and other executives may not realize how fee structures, best practices, and technology have evolved in recent years to enable a less expensive and more compliant offering,” continued Abernathy. “It’s important for these leaders to become educated and take steps to ensure they minimize legal and financial risks.”
SEE ALSO:
• How 401(k) Participants Benefit from Employer Matches, Falling Fees
• Plan Sponsors Focused on Reining in Fees: Callan
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
