Fees in Retirement Plans

Fees are an important consideration for retirement plan sponsors and participants. Under Department of Labor rules for how fees on defined contribution plans must be disclosed, employers and workers receive standardized fee disclosures on all investment options in their 401(k) plans.

Fees cover essential and valuable services provided to investors in the operation of retirement plans. ICI Research has observed and documented a broad trend of declining fees across the fund industry, with most assets in 401(k) plans concentrated in lower-cost funds.

Fees in the Competitive 401(k) Market

The 401(k) market is highly competitive, with many types of providers vying for market share. Plan sponsors and participants have shown themselves to be sensitive to fund fees and expenses.

According to ICI’s most recent research, for example, 90 percent of 401(k) plan equity mutual fund assets were invested in mutual funds with expense ratios of less than 1.00 percent. This sensitivity is consistent with the broader trend of declining fees across the fund industry. Since 1993, for example, average expenses and fees for investors in US equity funds have dropped by nearly 30 percent.

Employers and employees generally share the costs of operating 401(k) plans. As with any employee benefit, the employer typically determines how the costs will be shared. In addition, pension law ensures that 401(k) plan sponsors (generally, employers) have a fiduciary responsibility to act in the best interest of plan participants. The choice of options offered in a sponsor’s 401(k) plan menu is held to this high standard.

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Fee Disclosure

Under Department of Labor (DOL) rules, employers and workers receive a standardized set of disclosures on all investment options in their 401(k) plans. These disclosures, which highlight any plan-level fees, ensure greater uniformity of disclosures from investment type to investment type. These DOL rules, which went into effect in 2012, were strongly supported by ICI.

Information that has long been available to participants from mutual funds—for example, identification of investment objectives, principal strategies and risks, historical performance, and fees—now must be provided directly to participants for both mutual fund and non–mutual fund investments. This uniformity makes it easier for participants to make well-informed investment choices.

Fees Pay for Valuable Services

All investments—including such retirement-savings systems as defined contribution (DC), defined benefit, or hybrid plans—involve fees and expenses. Among other things, fees cover the cost of investment management and services (including custodial, legal, transfer agent, and recordkeeping services) that are essential to the operation of retirement plans.

Research conducted by Deloitte Consulting LLC on behalf of ICI has examined the “all-in fee,” which is a comprehensive measure (as a percentage of plan assets) of administrative, recordkeeping, and investment-related fees paid by the plan sponsor, the participant, or the plan. The study showed that the median DC plan participant has an all-in fee of 0.67 percent of assets, with fees ranging from 0.29 percent for participants in the 10th percentile to 1.29 percent for participants in the 90th percentile. Larger plans tended to have lower all-in fees.

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Inside the Structure of Defined Contribution/401(k) Plan Fees, 2013 (pdf)

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