With such a seemingly basic concept, why are 401(k) plan fees so elusive and complex? There is a common misconception in the marketplace that plans are “free” or offered at an insignificant cost. With the new DOL regulations on fee disclosure, fee transparency will become more important than ever before, as all plan fees will need to be disclosed. This article provides a summary of the types of parties and services involved in offering a 401(k) plan and how fees are charged for these services. Learn more at http://www.nafcu.org/pentegra

1. THE FREE 401(k) PLAN – FACT OR FICTION?
by Scott D. McCarthy, QPA, QKA, Pentegra Retirement Services
The 401(k) plan has been around for decades. It has become the most popular retirement
program offered by employers and also the most recognized retirement plan by employees.
The basic premise of a 401(k) plan is to allow employees to save for their own retirement on a
pre-tax basis through a simple and convenient means – payroll deduction. The money is then
invested by participants in various investment options offered by the plan.
With such a seemingly basic concept, why are 401(k) plan fees so elusive and complex? There is
a common misconception in the marketplace that plans are “free” or offered at an insignificant
cost. With the new DOL regulations on fee disclosure, fee transparency will become more
important than ever before, as all plan fees will need to be disclosed. This article provides a
summary of the types of parties and services involved in offering a 401(k) plan and how fees are
charged for these services.
WHAT ARE THE TYPES OF AVAILABLE SERVICE ARRANGEMENTS FOR 401(k) PLANS?
There are a vast number of service arrangements available in the 401(k) marketplace today.
Service arrangements often combine several providers in servicing a 401(k) plan, including a
Plan Administrator, Third Party Administrator (“TPA”), Recordkeeper, Trustee and Custodian,
Investment Manager, and Legal Counsel.
Many 401(k) service providers play most or all of these roles. These firms are often referred to as
full-service providers. There are other firms that also offer all of these services, but may have
alliances or other arrangements to fill-in for a function that they don’t provide directly (e.g. legal
services, Trustee, etc.). There are other providers that maintain a single focus and provide only
one area of expertise to the plan sponsor.
A fully-bundled 401 (k) plan will typically obtain all the services needed from one firm,
streamlining administration for the plan sponsor. Alternatively, 401(k) plans may take the
unbundled approach and fill the roles with multiple firms. Under an unbundled approach, most
of the plan administrator functions are often outsourced to a third party administrator (“TPA”)
and/or record-keeper. The TPA provides the legal plan documents and performs compliance
testing, IRS filings, and other administrative duties. The Recordkeeper maintains all participant
accounts and reflects all Plan level activity (e.g. contributions, distributions, investment
gains/losses, etc.). The Trustee oversees the plan assets. The Investment Manager manages the
investment funds to which the employer and employee contributions to the plan are directed
by the employee or employer. A plan’s legal counsel will maintain the plan document (if not
maintained by the TPA) and provide legal advice. In most cases, the employer is the plan
sponsor and plan administrator.
Bundled arrangements often provide a simpler approach for the plan sponsor. Typically, a fully
bundled provider will also be less expensive. One of the perceived disadvantages of an
unbundled approach is that there will be too many parties involved in the process, complicating
administration for the plan sponsor, and increasing costs because you will be adding one more
party to the mix who has to be compensated.

2. WHAT TYPES OF FEES ARE CHARGED TO A 401(k) PLAN?
In many 401(k) plans, administrative type fees are paid directly by the employer as billed by the
service provider and/or by the participant as a deduction from the participant’s 401(k) account.
In some cases, especially for large plans, these fees are paid by investment fund revenue
sharing. This is one area where there are many common misconceptions about whether a plan
is “free”.
While there may be no out-of-pocket cost for the plan, investment revenue sharing offsets any
fees that would have been charged to the employer or deducted directly from the participant
account. In many cases, these fees decrease the investment funds’ overall rate of return, which
makes it difficult for the average plan sponsor or participant to know the amount and when the
fee is charged. This is one reason why it is important to understand the types of investments
offered under a plan.
There are several types of investments that can be offered under a plan and many appear
similar, but in fact can be very different. Depending on the investments offered, there may be
revenue sharing among the various service providers. In addition, a wrap charge may be
added, which is an additional charge against the Plan’s assets in addition to the investment
management expense. Finally, certain investments may have surrender charges, hold backs
(funds may not be able to be fully liquidated on demand), or other hidden fees and restrictions.
IS FEE DISCLOSURE THE ANSWER?
Recent changes in law will require more transparent fee disclosure to both plan sponsor and
participants beginning in 2011. This should help identify all the fees charged by a 401(k) plan.
However, it may not address whether plan fees are reasonable. While what is considered
“reasonable” when it comes to plan fees can be subjective, plan sponsors should consider more
then just fees when comparing service providers.
• Is the plan design complex or basic?
• What is the size of the plan (assets and participants)?
• How many locations need to be serviced?
• Do you want the service provider to handle all aspects of the plan and administration or
are you comfortable with some of the responsibility?
• Do you need state-of-the-art technology for you and your participants?
• Who will handle participant communications?
• If you maintain more than one plan with the service provider, what is the multi-plan
discount, if any?
In reality, there is no such thing as a free 401(k) plan. Identifying all the plan fees and included
services is the challenge to ensure any fee comparison is valid.
THE PENTEGRA ADVANTAGE
Pentegra Retirement Services is a full-service retirement provider serving clients nationwide. Our
fees are transparent and easy to understand and, in most cases, all-inclusive. Pentegra’s
consultative approach helps plan sponsors navigate fee complexities and service arrangements
when reviewing an existing program or searching for a new service provider. For more
information, please contact us at www.pentegra.com or 800-872-3473.