The Hidden Costs Behind Retirement Plans

When it comes to retirement plans, the number one reason companies change their investment manager or recordkeeper is high fees. However, it is very difficult for plan sponsors to accurately assess fees because these costs are typically confusing, hidden, and convoluted (sometimes intentionally). Not to mention, indirect compensation is often not disclosed, or disclosed in a complex and confusing manner, so as to prevent sponsors from conducting a transparent comparison of service providers and investment options.

While we recommend seeking out expert advice or identifying a provider that can offer transparent cost comparisons, it’s also important to understand the services that make up the majority of hidden retirement plan fees.  While fees are sometimes referred to by different names, there are standard services that will typically fall into one of three categories: (1) plan administration and recordkeeping, (2) fund expenses, and (3) ancillary transactional fees. This simple framework will help you  make better decisions about plan vendors.

1. Plan Administration Fees

There are a LOT of service providers involved in managing a 401(k) plan. As a result, they can add up to a considerable amount in fees. Here are some to be aware of:


Recordkeeper: The recordkeeper tracks basic plan information. They record who can participate in the plan, the flow of money, and the investments participants make.

Third Party Administrator (TPA): This service provider serves as a mediator between the plan sponsor and the compliance guidelines set forth by the DOL and IRS. They do this by running compliance testing, producing the Form 5500, preparing plan documents and benefits statements, and tracking general activities carried out by participants.

Custodian: The Custodian is the institution that holds the retirement assets.


3(38)/3(21) Investment Advisor: These services are for the investment fiduciary liability that a plan may outsource to or share with an advisor or service provider.

3(16) Plan Administrator: This is a fiduciary that helps execute the day-to-day tasks of plan administration, including distributing participant notices and disclosures and filing year-end compliance documents.

Advisor: This includes plan sponsor consulting, participant education, and investment expertise.

Trustee: This service provider directs movement of assets in a plan.

2. Fund Expenses

These are costs associated with the underlying investment products offered by a plan, such as any combination of Mutual Funds, Exchange Traded Funds (ETFs), or Collective Investment Trusts (CITs). Fund expenses may seem like the most obvious fees, yet funds can hide fees charged by other services providers from the plan sponsor and participants. Here are some common expenses you may find:

Trading Fees: This is charged by fund management company to buy or sell an investment instrument.

Fund Management Fees: The charge to manage a fund; usually paid periodically as percentage of assets under management.

Fund Administration Cost: Charged for day-to-day administration of a fund.

Revenue Sharing: A charge that may be included as a portion of overall fund expenses, paid out to a service provider, typically disclosed as 12b-1, or Sub-TA fees.

Guaranteed Income Products: Guaranteed income products offer a minimum level of income for life. However, these products can charge additional fees that are not required on the participant fee disclosure and early redemption fees if the participant exits the program early.


3. Ancillary Fees

These are one-time fees for individual transactions that a participant may or may not choose to carry out. Below are some common activities that may result in a  charge to the participant:

Loans: These are fees related to taking a loan against the assets in a 401(k).  They are often substantial and may be ongoing for the maintenance of loan repayments.

Rollover: Some plans may charge participants to move assets out of a previous 401(k) and into a new one.

Domestic Retirement Order (QDRO): A QDRO fee pertains to the allocation of assets in a retirement or pension following a divorce or legal separation.

Distribution: A participant may request a distribution from certain plans due to termination of service or an applicable in-service provision in the plan document.  


The complexity of retirement plans requires a lot of services that can add up quickly. That's why it is so important to understand what you are paying for and why. Staying on top of fees helps keep participants from overpaying and gives plan sponsors peace of mind that they’re making the right decision for their workforce.

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