How Can I Reduce Costs?

Identify Expenses

The Department of Labor has identified no less then 17 charges that may be part of your 401(k) plan. A GAO study on plan fees released in April 2012 showed that most plan sponsors underestimated the plan expenses by almost 85%. The first step to getting control of the costs in your plan is to identify them.

Request for Proposal

Issue an RFP for each of the key service areas every three years. At a minimum, RFPs should be issued for record keeping, third party administration, and investment advice. This lays the groundwork for performance expectations. Establishing a competitive bid system for these services serves to keep pricing competitive.

Who Pays

Plan participants pay most of the 401(k) fees. More often than not, these costs are buried in the expense ratio of the mutual funds in the plan. Plan sponsors, lured by the convenience of an all-in-one service provider are often pleased by what appears to be the low cost of the service. In reality, many of these plans are more expensive than most. The reason for the misunderstanding is quite simple: the sponsor is equating the cost of their plan with the price the company pays. In fact, the plan participants usually pay most of the plan expenses.

Tax Implications

Plan sponsors should explore the possibility of billing some or all of participant expenses outside of the plan. This way the cost is tax deductible and more money stays in the retirement savings account. 

Fund Classes

Most mutual fund families offer more than one class of the same fund. The American Funds EuroPacific Growth Fund, for instance, has 12 separate classes of the same portfolio, each with a different expense ratio. Understanding the fee structure of the investments in your 401(k) plan is one of the best ways to keep costs under control.

Fee-Based Investment Manager

Hire an investment manager as defined by ERISA §3(38) that does not accept payments from any third party. They have the experience and expertise to see that the mutual fund class used in your Plan is the least expensive of those for which you qualify.