Retirement Plan Fees & Expenses - Small Business Planner

Retirement Plan Fees & Expenses - Small Business Planner

Setting up and managing a smoothly functioning retirement plan for your employees requires a clear understanding of the costs, investment options and regulations governing private sector retirement plans. Under the Employee Retirement Income Security Act (ERISA), the fiduciaries responsible for the plan must ensure provision of necessary services at a reasonable cost, keep plan participants informed about all investment options, monitor the latest status of all investments and update plan participants regarding the same.

While the facts and statistics stated below are applicable for the 401(k) plan, the general principles outlined are valid for all types of retirement plans. The fees for 401(k) plans fall under three broad categories – Administration fees, investment fees and individual service fees.

Administration Fees: These include all expenses for day-to-day operations such as record maintenance, accounting, legal and trustee fees. Optional and additional expenses under this category include expenses related to retirement planning software, investment advisory services, and electronic access to the plan services and online transactions.

Investment Fees: The investment management fees make up the bulk of the total expenses associated with a retirement plan. This is on account of the fact that plan managers, who would be the most likely choice for providing investment advice, generally charge fees based on a percentage of the total assets administered under the plan, in addition to transaction fees.

Special care needs to be taken by the employer, or his appointed plan supervisor, to ensure that the investment fees charged properly monitored. This is on account of the fact that these fees are generally deducted from the returns on the investment, and the net return on the investment is considered to be the return on hand after the fees are deducted. Thus, an unscrupulous investment advisor who is not properly monitored could manage to deduct additional sums as his fees, since the amounts do not turn up in the net returns, based on which the plans expenses and earnings are calculated.

Secondly the transaction cost of buying or selling financial products and derivatives, such as stocks and mutual funds, carry sales charges, or loads, and might vary depending upon the product and broker. Therefore, it is essential to choose an investment service which has zero or very low loads.

Lastly, depending upon the required, or desired, rate of return, you have the option of choosing to keep the plan investments actively managed, which would provide a greater return rate, along with higher investment advisory expenses, or you can select passively managed investments, such as index funds, which track a specific index, such as the S&P 500, and require very little human intervention, thus reducing the associated management fees. Please note that the returns from passively managed funds are likely to be les than those from actively managed funds.

Individual Service Fees: If the plan offers individual and optional services to plan participants, there may be expenses associated with providing these services, and the plan manager would be responsible for charging each individual participant as per services chosen. An example of this kind of service would be a loan, or credit facility, offered against funds accumulated in the plan.

In summary, before you start a retirement plan, you should be aware of the number of plan participants, the total monthly contributions you would need to make, the expected rate of return and associated investment types and options, and have a list of all specific services you need from the plan manager and investment advisors. Once the plan is operational, monitor all expenses, plan performance and obtain feedback from employees regarding their satisfaction with the management and performance of the plan.