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If you’ve been paying the least bit attention, you know there’s a concern that some 401(k) plans have excessive fees. Recent headlines attest to this, as plans are regularly involved in “excessive” fee lawsuits.
Is your 401(k) plan burdened by high fees? Do you even know how to judge when a fee is too high or when it’s commensurate with the value of the service provided? And, if you do feel your 401(k) fees are too high, do you have any realistic options?
It all starts with doing some research. This is the hard part. You probably don’t know what to ask for. The best way to cover this is to find out if any professional experts have commented about the fees in your company’s 401(k) plan.
“Ask your employer when the last time they benchmarked fees was,” says Jeff Schneble, the CEO of Human Interest in San Francisco. “Many companies do this routinely every three or so years.”
That’s only part of what you should do. You’ll need to read the summary plan description, the plan’s investment policy statement, and its periodic due diligence reports to begin to glean where all the fees reside. The plan’s annual 5500 filing also has a line for fees, so that could help you, too.
“Plan participants need to be active participants,” says David Hicks, an investment adviser at Oakmont Advisory Group and the founder of Smpl Wealth in Albuquerque, New Mexico. “Reading the plan details will provide you with important information about the plan, the provisions, the limitations, advantages and fee structure.”
If it sounds like a lot of work, it is. It’s also potentially hard work, not because your company won’t help you, but because the service providers of your 401(k) plan may not be as forthcoming with regard to the information you seek. In this sense, you and your company might be in the same boat.
“The only realistic ways the participants can provide input is through the trustees of the plan,” says Dr. Guy Baker, founder of Wealth Teams Alliance in Irvine, California. “They need knowledge and information to do so. The less disclosure, the less opportunity participants have to influence the direction of the plan.”
How might you get around this potential roadblock? You can bring in your own financial professional. Yes, it will cost you, but at least you know you’ve got a more objective observer when it comes to scrutinizing the plan.
“Working with a financial planner could help you sort through the best options and provide you an overview of the plan benefits,” says Hick. “Your 401(k) plan will most likely be your best option to build retirement assets, and knowing what you’re paying, what risk you’re taking and how your plan is structured is extremely important.”
What happens if you do find your 401(k) pays more in fees than you think it should? The first protocol is always to obey the chain of command. “Participants can bring up fee concerns to management or investment committees,” says Andrew Cremé, Financial Advisor at Raymond James
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Find out the individual or group responsible for overseeing the plan. That is the person or people you should talk to first. Don’t believe, however, that it’s as simple as making a complaint. There needs to be some justification for your feelings. The Department of Labor has said it’s OK to pay above average fees if you’re receiving above average value for the service performed. You might not be able to make this determination. Those in your company administering your 401(k) plan are in a better position to know this.
Still, you might disagree with your company’s assessment. That doesn’t mean you should stop. If you’re particularly passionate, you do have other options.
“Assuming that everything about the 401(k) plan is legal, employees could get together and go to management and HR as a group to complain that they think the fees are too high, and perhaps request an outside company do an audit for a fee comparison,” says Anthony Wentzell, Financial Coach at Plan and Act in Windermere, Florida. “If they suspect the fees are unreasonably high, or there is something illegal about the way the plan is being operated, they could reach out to the Department of Labor to file a complaint about the plan.”
If you aren’t willing to rock the boat too much, you have other alternatives that may comfort you in their relative quietness, at least in the sense that they probably won’t attract too much attention.
“You can consider other options outside of a 401(k) that are available as an investment vehicle, such as IRAs, Roth IRAs, brokerage accounts, etc,” says Cremé.
One thing to remember, though, is the requirements to receive matching 401(k) contributions from your company. You don’t want to be “penny wise and pound foolish” and miss out on substantial free money for the sake of a few cents. The company match is only one variable in this equation. There are others, too.
“I would only recommend forgoing the match if the fees were high enough to justify putting the assets into another tax-sheltered vehicle like an Individual IRA,” says Wentzell. “You would need to do a cost/benefit analysis to find out if this would make more sense. You can also contribute a lot more to your 401(k) than an IRA, so it still may make sense to keep putting the funds into the 401(k) since you will be able to reduce your taxes by a lot more (i.e. in 2020, someone who is 50 or older can put up to $26,000 into a 401(k), whereas they are only allowed to put up to $7,000 into an IRA.) So, you may be saving a lot more in taxes, even if your plan fees are on the higher end, to justify putting the max into the 401(k). This is a simpler answer for someone who can only afford to put away, say $5,000 annually into their retirement account.”
As with many questions, there are often not very straight-forward answers when it comes to fees in your 401(k). For example, is the added cost of hiring an outside party to help you worth it? Only you can tell.
In the meantime, remember your 401(k) is a free benefit offered by your company. It’s only one part of your entire lifetime plan. It makes sense, therefore, to concentrate on your own financial wants and desires. Rather than worrying about fees, focus on how your company’s retirement plan helps you achieve your overall goals.
“Participants should review the options their company provides to find a plan that meets their needs,” says Nishank Khanna, CFO of Clarify Capital, Manhattan, New York. For those seeking lower fees, the company’s plan may already have existing choices. “If you feel more comfortable trusting a human with their financial planning, rather than a robo-advisor, higher-fees are much more justifiable,” says Khanna.
There’s no such thing as a free lunch, so don’t fall prey to those touting “lower” fees. Sometimes you get what you pay for.
But that doesn’t mean you should simply ignore fees.