Study Finds Employers are Overpaying on Retirement Plan Fees
A recent report by Abernathy Daley 401k Consultants found that over 80% of companies with 100 or more employees are overpaying on administrative fees for 401(k) and 403(b) plans. While there have been opportunities over the past three years for companies to reduce fees, the report shows that many employers have not taken the time to compare existing fees to industry benchmarks. Unfortunately, this has resulted in overall higher expenses to manage plans. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.
What did the study find?
The firm analyzed Form 5500 data for 46,829 plans in Texas and found what they believe to be 40,272 plans that are overpaying for administrative and investment fees. This includes about 79.8% of large company plans and 90% of smaller company plans. Because the reason plan sponsors haven’t switched to more reasonably priced providers is unknown, the study suggests it is likely due to a lack of awareness about other options.
Even with plans with more competitive administration costs, findings indicate that over 80% have higher-cost investments with “excessive fees and additional costs.” These could be easily replaced with other investments that could yield similar or better returns. Not only is this in the best interest of the participants, but it’s also a legal responsibility for plan sponsors to offer competitively priced alternatives to participants as fiduciary.
Non-Compliance Issues
It was also found that companies are not regularly benchmarking their retirement plans in a compliance-related way. This has put plans at risk of being non-compliant with reporting requirements for the Employee Retirement Income Security Act (ERISA). 401(k) plans must clearly disclose to employees what fees and investment options are included in their plans.
Companies also put themselves at risk by implementing or designing plans improperly. One of the biggest problems comes from plans with improperly implemented profit-sharing components. There may also be issues with eligibility criteria misaligning with internal rules. For example, in some cases, there may be conflicting data about whether part-time employees can enroll in a plan or what length of service is required to reach eligibility. If the criteria are misaligned with internal rules, it can lead to operational errors or discrimination issues.
More complex plan structures, like Cash Balance Plans, involve intricate calculations and require specific compliance testing to ensure they meet legal and regulatory requirements. Employees may receive incorrect benefit payments if there are errors in calculating balances. If this happens, the plan could fail required compliance tests and be subject to various punishments, including losing the tax-exempt status.
What are the consequences?
The lack of independent assessment can prevent companies from identifying and negotiating lower-cost plan fees. Without regular benchmarking, companies are not able to capitalize on potential savings. Beyond this, plans also risk overcharging employees and can face legal consequences, such as penalties and lawsuits.
These consequences aren’t just theoretical; they’re already happening. A $400 million retirement plan settled a lawsuit for $1.5 million in October 2024. In 2023, 48 lawsuits were filed on excessive fees, a smaller number than in recent years. However, this is likely due to a backlog created by previous excessive fee lawsuits filed. The issue has gotten so contentious that the Supreme Court has even been asked to weigh in on standards for determining excessive fees.
What can businesses do?
Even slight differences in fees can add up over time. The best way to counter the problem, keep costs low, and remain compliant is to benchmark retirement plans annually by working with a third party that can act as a legal fiduciary.
Adding one more thing to the list of to-dos can feel overwhelming, but a benchmark analysis for retirement plans takes relatively little time, typically around one week, and can help move plans in the right direction. The more important part is effectively implementing findings from the benchmark study after it is conducted. Companies should also provide high-quality investment funds to employees and create time for plan participants to meet with financial educators.
Contact Us
Many companies are overpaying for retirement plan services. To ensure your company is charged a fair and competitive fee for services, conducting an annual benchmarking exercise is essential, creating an opportunity to make changes when needed. If you have questions about the information outlined above or need assistance with your next benefit plan audit, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.
