401(k) – How Much Does It Cost?
It’s a simple question really – “how much does it cost?”. We have all had that experience where we ask what something will cost and get an answer that is so twisted and turned around that we are left with a headache and confusion. Too often that is the experience of 401(k) Plan Sponsors and participants. I suppose that is what happens in an industry that has decades of experience in obscuring and hiding the full facts and truth in layers of industry speak.
So, let’s keep this simple and straight forward. Typical 401(k) plans will have the following five parts or services associated with them. Sometimes these services are bundled together and provided by one or two companies, where other plans choose to use an unbundled or open architecture approach in creating their 401(k) plan. Regardless of whether the services are bundled or not, they come with a cost. If you know the services involved in a plan, you can learn the costs.
Custodian –holds the money of the Plan – this includes the money deferred by the participants and any match money contributed by the plan sponsor.
Record keeper - keeps track of each individual participants account value. The record keeper balances up with the custodian to make sure the individual accounts in the plan add up to the total of the plan assets held by the custodian.
Third Party Administrator (TPA) – creates the plan document for the 401(k) plan, does any required testing of the plan, prepares the annual tax filing (5500) and creates plan amendments as necessary.
Plan Advisor - usually the person who sells the 401(k) plan services to the plan sponsor, selects the investment options for the plan and provides advise to both the plan sponsor and the plan participants.
– these are the investments available to the plan participants – the cost of these investments is measured by what is called the expense ratio, a fee charged by the company managing the investments.
An additional service that is becoming more common among plans is to hire a named fiduciary and plan administrator. Plan sponsors can out-source or delegate required duties to professional firms - thus alleviating liability and keeping the plan in compliance with the laws, rules and regulations of the Employee Retirement Income Security Act (ERISA).
We all enjoy the satisfaction of knowing we have gotten a good deal – in other words, we spent our money wisely and in a value -added manner. Value is not solely dependent on price; but, it is certainly an important component in determining if you have created value with your spending. ERISA law requires that you know the costs of your plan and that the services of your plan providers justify their costs. The start to fulfilling your fiduciary responsibility is to know the “all-in” costs to your plan. Wouldn’t it be nice if twice a year you had a meeting in which the costs of your plan were reviewed, benchmarked and documented with you and the service providers you had hired? Well, that’s what we do – simple, transparent and accountability – it’s the right way to do it.