The fees charged to your 401(k) Plan account as a Plan Sponsor should be a concern to all plan fiduciaries. We are seeing more and more lawsuits including plan action lawsuits against Plans and Plan Sponsors for unusually high fees and unreasonable fee charges that impact participant accounts.
Fees can be charged in many ways:
- Direct charges,
- Fees charged for a specific transactions,
- Revenue sharing,
- Reduction of investment earnings and other types.
Some plans have a headcount charge and/or fees charged based upon the assets under management by a provider. Both of these charges are increased if you have former employees that leave their assets in the plan long after they depart your company.
Recent studies indicate that former employees are leaving the accumulated balance in accounts sponsored by their former employer. According to research by the J.P. Morgan Asset Management Group from 2018-2019, 42% of participants in this situation leave their funds in the former employer Plan and do not take time to move the account to another Plan, an IRA or other retirement options offered by a subsequent employer. The balances average $156,000 per participant. Click on the link provided to review the full report referenced here. https://am.jpmorgan.com/us/en/asset-management/institutional/insights/retirement-insights/defined-contribution/retirement-by-the-numbers/
While the preparers of the report are unsure of the exact reason for this trend, most believe that it is partially due to participants not actively managing their account (i.e. it is the action requiring the least action on their part). Also, leaving money with an employer sponsored plan may provide additional investment options to the participant, better investment options, lower fees, etc. It may be a better option than any other option available to the participant at the time they leave employment.
If you are the Plan Sponsor, however, these participants may be causing additional fees to your Plan. Especially if the Plan Sponsor pays the related fees. They also cause additional administrative time for your HR or benefits administration staff for participants that are not employees.
So, how can you avoid this?
We recommend management consider adding a provision to their Plan Document allowing them to move these accounts (usually below a certain dollar limit) to outside accounts or an IRA account set up for the participant. Also, consider adding a termination review with employees and provide paperwork and web access to remove their accounts from the Plan. Follow-up if they do not take the requested action.
No employee action taken.
If the employee does not take action at the time of termination, you will be required to provide disclosures to them periodically so make sure that you have good contact information at the time of termination. Then with the required disclosures, you can also provide information to them to aid them in moving their account to another plan or to an IRA. The more attempts you make the more likely the participant is to take action.
Steps to reduce fees
These steps will help you execute your responsibilities as a fiduciary to reduce fees charged to the Plan and may also help reduce the benefit administrative costs to your company and the time required to administer the regulatory compliance features of the Plan. Not conducting these procedures could make the Plan fall out of compliance with required federal regulatory requirements. Adding a few additional steps to your termination procedures can aid in reducing costs, fees and time related to your Plan administration in this area.
At Summit CPA we specialize in retirement plan audits. If you would like to discuss our audit process in more detail or need an audit contact our office at (866) 497-9761 to schedule an appointment. We can help you navigate the world of the 401(k) audit as proficiently as possible. We also offer off-site assistance and flat-fee pricing so there are no surprises when the job is complete.