401(k) Recordkeeping Fees: What’s Reasonable, and Why Average Isn’t

Every 401(k) plan pays for recordkeeping and administration. ERISA requires plan fiduciaries to make sure those fees are reasonable, and to keep checking. But “reasonable” is not the same as “average”, and the way a fee is charged can hide what the plan is really paying.

What recordkeeping fees pay for

A recordkeeper keeps track of every participant’s account: contributions, investment choices, loans, distributions and statements. Recordkeeping and administration usually also include the participant website and call center, required notices, and support for the plan’s annual compliance work. The cost of these services is driven mainly by the number of participant accounts, not by how much money is in them.

How 401(k) administration fees are charged

Recordkeeping fees are paid in one of three ways, and many plans use a mix:

• A fixed dollar amount per participant, paid by the plan, the participants or the employer.
• An asset-based fee: a percentage of plan assets, so the fee rises whenever the plan’s assets grow.
• Revenue sharing: part of the investment funds’ expense ratios (such as 12b-1 and sub-transfer agency fees) is paid to the recordkeeper.

Asset-based fees and revenue sharing make the real price harder to see. They can also shift costs unfairly between participants: someone with a large balance pays far more for the same service than someone with a small one. Fee leveling solutions can correct some of these inequities, but only if fiduciaries know it is happening.

Measure recordkeeping fees in dollars per participant

Because recordkeeping costs follow the number of accounts, the most meaningful way to compare them is the effective dollar amount per participant: every dollar the recordkeeper receives for recordkeeping and administration, from every source, divided by the number of participants. A fee quoted as a small percentage can look modest and still be far above the market once it is converted to dollars per participant.

Why the average 401(k) fee is not a reasonable fee

Most fee surveys and many benchmarking reports compare a plan with the average or median fee paid by similar plans. But average is not reasonable. The average includes many plans paying more than the market rate. Common reasons include:

• their fiduciaries are not following a prudent process;
• their recordkeeping fee is asset-based, so it has grown with the markets while the services have not changed;
• the plan has grown significantly in assets or participants but has never been repriced.

Plans above the 50th percentile are almost always paying excessive fees. The better question is not “what do similar plans pay?” but “what would a prudent fiduciary be able to obtain in the market for materially identical services?” That market rate is usually well below the average.

Look at the whole relationship, not just the headline fee

Recordkeeping fees and investment fees should be evaluated separately and together, because each can affect the other. A provider may discount its recordkeeping fee when the plan uses its proprietary investments, or earn revenue from managed accounts, IRA rollovers, brokerage windows or other services. Recordkeeping fees across the industry have been falling, and providers increasingly look to these other sources for revenue. A low quoted fee is only a good deal if the total economic relationship is reasonable.

What excessive-fee lawsuits allege

Recordkeeping fees are one of the most common targets in 401(k) class action lawsuits. Complaints commonly allege that fiduciaries:

• failed to monitor recordkeeping fees on an ongoing basis;
• allowed the plan to pay too much per participant for recordkeeping; or
• failed to consider indirect revenue, such as revenue sharing, that the recordkeeper received.

The common thread is process. The question is rarely just “was the fee high?” but “did the fiduciaries have an informed, recurring and documented process for deciding it was reasonable?”

A prudent process for recordkeeping fees

1. Benchmark every year, and again after any significant change in the plan’s assets, participants, provider or contract.
2. Compare with the market rate, not the average, using effective dollars per participant and counting every source of recordkeeper revenue.
3. Run a competitive RFP at least every three to five years; that has long been accepted practice among prudent fiduciaries. A benchmark is never a substitute for competitive bids.
4. Negotiate toward the market rate, with the benchmark and the bids as evidence.
5. Document the decision: what was compared, what was considered and why the final choice was made solely considering the best interest of plan participants.

A documented benchmark is a necessary part of a prudent process, but not all of it. It shows where you stand; acting on it is what protects the plan’s participants and its fiduciaries.