Paying Too Much in 401(k) Fees?

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Employers and participants alike are often left wondering what exactly they are paying in 401k fees.  New rules from the Department of Labor (ERISA Section 408(b)(2)) aim to make the fees charged for 401k services more transparent in order to assure that the 401k fees charged are reasonable.  But this begs the question:

What is a reasonable fee to pay for your 401k?

A study by the Investment Company Institute gives some solid guidelines as to what fees are reasonable in a 401k plan on a relative basis.  The study found that the average fee for all-in 401k services (recordkeeping, administration & investment management) averaged 0.72% of assets. 

This figure can be slightly misleading as it includes all plans across all asset levels.  The large plan market, plans with assets in excess of $500 million, averaged just under 0.50%.  While the “micro” plan market, plans with assets under a $1 million in assets averaged 1.89% in fees. 

While there are too many variables to give a range that will work for all plans, the following list attempts to place some ranges on what should be considered reasonable.  It is important to keep in mind that the law does not place any financial constraints on the actual fee charged, but only dictates the fee be reasonable for the services provided. 

Sample Guidelines for Reasonable 401k Fees-

Micro (Under $1 million)                       -1.40% to 1.80%*

 Small ($1 - $5 million)                         -1.25% to 1.50%*

Lower Middle ($5 - $50 million)             -0.72% to 1.25%*

Upper Middle ($50 - $500 million)          -0.50% to 0.72%*

Large ($500 and Over)                          -0.30% to 0.60%*

(*These ranges are not to be considered legal or investment advice.)

The 401k service industry has been increasingly fee focused in recent years and the 408(b)(2) legislation will continue this trend.  However, it is important to find a balance between services and fees when selecting a provider.  Employee education and communication suffer as a result of the (often misguided) commoditization of the 401k industry.  As employers have increasingly singled out fees as their primary decision making criterion employees are left looking for resources.  As we move forward under the new regulations it is important to remember reducing cost is important, but it must be balanced with the quality of service provided.