Plan Sponsors May Be Paying Too Much in DC Plan Fees

Some 80% of companies were spending more than efficient pricing for 401(k) and 403(b) plans, Abernathy Daley 401k Consultants survey finds.

Research by Abernathy Daley 401k Consultants found that nearly 80% of plan sponsors with at least 100 employees are overpaying on administrative fees for their 401(k) and 403(b) plans. Out of 6,566 companies surveyed, 5,241 were found to be paying more than the most efficient pricing available, based on a review of Form 5500 filings conducted by the firm.

The data suggest that companies have not performed independent benchmarking on their corporate retirement plans, leaving them exposed to excessive costs and potential compliance risks. Over the last three years, retirement plan fees have decreased, yet a significant portion of organizations have not realigned their pricing structures accordingly. Abernathy Daley 401k Consultants is an affiliate of the Abernathy Group II LLC family office.

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Administrative fee pricing typically depends on the number of employees and the total assets managed under the plan. Abernathy Daley’s report advised that companies paying more than 0.3% in administrative costs, based on total assets, are likely overpaying by tens of thousands to hundreds of thousands of dollars annually. This overpayment can severely impact both the employer and employees’ retirement savings.

The lack of regular compliance-related benchmarking has also raised concerns about legal exposure and best practices adherence, according to the New York-based consultancy, which provides advice on 401(k)-plan administration and employee education. 

Importance of Benchmarking

Abernathy Daley recommended that companies conduct annual third-party benchmarking of their retirement plans. Such evaluations should be performed by legal fiduciaries to ensure fees are aligned with best practices and that companies remain compliant with regulatory requirements. Organizations that proactively review their plans can reduce excessive fees, mitigate legal risks and improve retirement outcomes for employees.

According to Abernathy Daley’s analyses, there are several compliance risks for firms associated with overpaying administrative fees. Companies are not complying with the Employee Retirement Income Security Act reporting requirements, which mandate clear disclosures on fees and investment options. This non-compliance can lead to penalties, lawsuits or other legal repercussions, especially if companies are overcharging employees, the firm noted.

Other Issues

Additionally, Abernathy Daley found, many plans suffer from poor design, particularly those with profit-sharing components, leading to operational and legal issues. Internal governance misalignments were also identified, particularly related to employee eligibility for participation based on full-time or part-time status. Further complicating matters, companies with alternative plan structures, such as cash balance plans, often fail to properly manage complex compliance testing, increasing their risk of non-compliance.

Matt Daley, president of Abernathy Daley 401k Consultants, says independent third-party consultants can help plan sponsors conduct an objective evaluation of corporate retirement plans, such as 401(k) and 403(b) options.

“During these assessments, the consultant analyzes plan fees, administrative services and investment options, comparing them against industry benchmarks and ensuring regulatory compliance,” he says. “Consultants can thus help employers uncover potential overpayments for administrative or investment services and identify opportunities to enhance the plan, ultimately benefiting their employees.”

Meanwhile, plan sponsors should also be making sure their plan advisers are doing their best work, periodically conducting requests for proposals for their plan adviser requirements. According to PLANSPONSOR’s Defined Contribution Plan Benchmarking Survey, drawing on 2,100 plan sponsors, 60.5% of firms have not initiated an RFP in at least four years.

Which Long-Term, Part-Time Employees Can Be Excluded From a 403(b) Plan?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

Q: I read in a recent Ask the Experts column that student employees who could previously be excluded from an ERISA 403(b) plan could still be excluded, even if they would otherwise qualify as long-term, part-time employees under ERISA. Does the same type of exclusion apply to employees who previously could be excluded from an ERISA plan because they normally work fewer than 20 hours per week?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

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A: No. Unlike the student employee classification, Notice 2024-73 makes it clear that an employee who normally works fewer than 20 hours per week and could be excluded under the existing universal availability provisions for 403(b) plans, but who also qualifies as an ERISA LTPT employee (for example, because that employee has worked at least 500 hours in at least two consecutive years), must be provided with the right to make elective deferrals in an ERISA 403(b) plan. Having said this, the plan may maintain an exclusion, such that if an employee does not qualify as an ERISA LTPT employee, the 403(b) plan could still exclude such an employee from the right to make elective deferrals.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.

 

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