Watching Retirement Plan Fees
January 13, 1999
Here are some tips on 401(k) or other retirement plan fees:
- Figure out what the plan's direct and indirect costs are. This may take some digging, particularly if the plan is handled through an insurance company. Next, even if the employer is happy with its service providers, it may want to send a request for proposals to several providers to get a sense of the market for plan services. Employers mainly concerned about investment costs can ask an independent advisor to evaluate expense ratios and other fees charged by the plan's investment vehicles.
- Don't be shy about negotiating. Many administrative and some investment fees can be reduced for desirable customers.
- Be careful about annuities. Many employers don't understand that the plan pays an additional fee to the insurance company to "wrap" mutual funds in an annuity product.
- Annuities also often have charges for life insurance features that the plan does not need.
- Reconsider bells and whistles. If the plan has administrative features or investment options that participants don't want, it may be possible to save money by eliminating them.
- Consider index funds. These funds have lower expense ratios than actively managed funds because their managers do not pick stocks based on research, but "passively" track the market.
- Ask about institutional funds. Most 401(k) plans invest in the same retail funds that are sold to individual investors. These tend to have higher expense ratios than funds sold to institutional investors, some of which may be available even to small retirement plans.
- Don't expect something for nothing. "Free" administrative services may not be a bargain if they are exchanged for high investment charges.
- Get help. An independent consultant without ties to an investment company or administration firm can provide an objective evaluation of current fees and suggestions for improvements.
- Finally, remember that fees are necessary—it costs money to run a profitable, understandable retirement program. The cheapest fund or service provider is not necessarily the prudent choice—nor is the most expensive.
Source: "The Purple," Copyright Landels Ripley & Diamond, LLP, Fall 1998. Reprinted with permission.