3 Ways to Reduce 401(k) Plan Costs

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Ensuring that a plan’s fees costs are “reasonable” is one of the principal duties of a retirement plan fiduciary. This would seem simple enough, yet ERISA does not define reasonable and regulators simply provide broad, general guidance relating to the matter. This leaves plan sponsors with little to no direction as to where to begin.

Plan sponsors, in conjunction with a strong retirement plan consultant, should establish an objective process for monitoring the fees and services provided by each one of the plan’s service providers. These service providers may include retirement plan advisors, record-keepers, third-party administrators (TPAs), investment managers, auditors, attorneys, or any firm or person being paid from plan assets. For many plan fiduciaries, an objective process typically includes the following steps with respect to investment options:

Critically review your investments.

First, utilize an open architecture investment platform with access to the entire investment universe. Investment management fees have continued to trend downward, year after year. Plan sponsors should take advantage of these improvements. Collective investment trusts (CITs) now offer plan sponsors and participants the ability to drive down costs through the elimination of some of the regulatory requirements that mutual funds are subject to. Plan sponsors should also strongly consider the use of passive investments, also known as index funds. Passive investments offer plan participants the opportunity to gain broad exposure to markets at low costs. Integrating these index funds into an investment menu helps to lower plan costs and offer cost conscious participants an avenue to gain diversification at competitive costs. Passive investments can offer exposure to a variety of asset classes such as Target Date Funds, U.S. Stocks, International Stocks, and Fixed Income. Passive investments can make a great impact across investment menus but plan sponsors should thoroughly vet these vehicles to ensure that participants are getting a solid, strong investment. Retirement plan consultants should be constantly engaged in the monitoring and benchmarking of vehicles and your record-keeper’s investment platform.

Renegotiate fees with plan service providers by benchmarking their services.

This can be done through request for proposals (RFPs or RFIs) or by simply benchmarking, where formal proposals are not requested. Plan sponsors should work to ensure that their plan is being treated like a new plan, with pricing to reflect that. When benchmarking fees, fiduciaries should look not only at the fees charged, but to the value of the services rendered. Remember, reasonable fees don’t always mean the lowest. Plan sponsors need to focus on the competency of their service providers, the suite of services offered, and the value provided to plan participants.

Hire an advisor!

Many people may think that hiring an advisor would increase plan costs. However, an effective advisor is your advocate. You don’t need the expertise to manage investment costs or the time to renegotiate with record-keepers, your advisor will quarterback this process on your behalf. And hiring a co-fiduciary reduces your own liability which reduces your risks over time.

All investments are subject to risk, including loss. Asset allocation and diversification does not ensure a profit or protect against a loss. There is not assurance that any investment strategy will be successful. Collective Investment Trusts (CITs) are not governed by certain regulatory requirements; and therefore, do not receive their protections. Target date funds seek to maximize assets for retirement in the approximate year (Target Date) listed in the fund name. The fund will gradually shift its focus from more aggressive investments to more conservative ones as the target date approaches. Investment in a target maturity fund is not guaranteed at any time including on or after the target date. Diversification does not guarantee a profit nor protect against loss. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The value of fixed income securities fluctuates and investors may receive more or less than their original investments if sold prior to maturity. Bonds are subject to price change and availability. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. To the extent that clients intend to hold these securities, the internal expenses should be included when evaluating the costs of a fee-based account. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs. A list of additional considerations, as well as the fee schedule, is available in the firm’s Form ADV (Part 2A) as well as the client agreement.

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