Plan Ahead for Investment Management Fees
The process of selecting a service provider and choosing company investments almost always rests with human resources managers, and there really is no set formula except to say you should always closely monitor investment management fees and expenses. Why? Because these fees and expenses can have a significant impact on your employees’ retirement savings. In fact, they can result in lower retirement income for workers, if you’re not careful.
Your service provider must comply with the standards provided under the Employee Retirement Income Security Act of 1974 (ERISA).
This federal law helps ensure that your company acts prudently and solely in the best interest of the plan’s participants and beneficiaries. Understanding fees and expenses is important in providing for the services necessary for you plan’s operation.
While ERISA does not set specific level of fees, it does require that fees charged to a plan be “reasonable.” For example, is it a “reasonable” expense to hire a dedicated benefits clerk? What if it materially reduced employees’ return on investment? According to one expert, fees can run between .75 and 2 percent of assets, depending, of course, on such variables as size and type of plan, number of employees, and whether you go with a frugal outside service provider or handle everything internally.
The U.S. Department of Labor and the American Bankers Association are pounding the drum on 401(k) fees. A new pamphlet lists questions employers should answer in considering fees and expenses paid for services.
- Have you decided which fees and expenses you will pay, which your employees will pay, and/or which you will share?
- Do you know which fees and expenses are charged directly to the plan and which are deducted from investment returns?
- Do you understand that some investment options have higher fees than others because of the nature of the investment?
- Does the service arrangement have any restrictions, such as charges for early termination of your relationship with the provider?
- Have you considered asking potential providers to present uniform fee information that includes all fees charged?
Overall, investment management fees seem to be dropping, according to one expert. That’s not to suggest you shouldn’t choose wisely your service provider, for in the end your decisions will make it possible for your employees to make better investment decisions.
Workforce, September 1999, Vol. 78, No. 9, pp. 86-87.