The Hidden and Not-so-hidden Costs of Retirement Plan Complacency

Sep 11

Worried about retirement plan costs? You're not alone. It’s tough to know if you’re getting a good deal from your service providers, and many organizations don’t really know what they’re paying, especially as regulatory requirements have evolved and plan complexity has grown. It’s not uncommon for organizations to discover they lack visibility into their plan costs, may not be receiving optimal value from service providers, or work with advisors who provide limited oversight.

It’s time to get smart on fees and benchmarking. This guide will help you understand the rules, how to compare your plan, and what pitfalls to avoid. First, we’ll review the legal foundation that governs retirement plan fees and the disclosure requirements that give you the information you need. Then we'll explore how benchmarking works and why it's such a powerful tool for ensuring you're getting appropriate value. Last, we’ll highlight the most common mistakes that can undermine your efforts, and importantly, help you recognize the warning signs that indicate your current advisor may not be providing the level of service your plan requires.

After all, fees are only an issue in the absence of value! A quick trip to the salad bar will show you.

Understanding the Legal Foundation

ERISA mandates that all plan fees must be "reasonable." This isn't merely a suggestion or best practice—it's actually a stated duty that requires active, ongoing attention. The challenge for many plan sponsors is first, understanding what "reasonable" means, and then, how to demonstrate that when scrutinized. "Reasonable" is a somewhat fluid concept, meaning the costs are justifiable when the quality and breadth of services are compared to others in the market.

You get help from two big disclosure rules. The first, ERISA Section 408(b)(2), requires your service providers to give Plan Sponsors detailed plan-level information about their compensation and services. Every service provider must clearly explain what services they'll provide, whether they act as a fiduciary, and break down all direct and indirect compensation they expect to receive. This helps you spot conflicts of interest, too.

Direct compensation is easy to determine. This is money that the service provider receives directly from the plan. You would see it somewhere, perhaps on a statement, because it means they get an actual check for services, or they bill against the trust.

Service providers must also identify all indirect compensation, such as revenue sharing, commission payments, or other fee arrangements. These fees are often deducted from fund assets or come from payments between providers, rather than being explicitly itemized and billed directly to the plan sponsor or participant in a transparent line item. This "embedded" nature can make it challenging for plan sponsors to fully understand the total cost of their retirement plan. Again, understanding these relationships is also how a plan sponsor can identify conflicts of interest since providers must explain not just how much they're receiving, but from whom and under what arrangements. (Side note, in the late 1990s and early 2000s, it was these hidden payments that led plan sponsors to tell me – and errantly assume – their plan was “free!”)

The second disclosure requirement, ERISA Section 404(a)(5), focuses on what you must disclose to your plan participants. It requires you to provide comprehensive information about plan fees, investment options, and administrative costs in a clear, comparative format that enables easy comparison between choices, and so they are aware of what types of transactions will have a cost associated with them, like taking a loan.

These disclosure requirements aren't bureaucratic exercises. They're the foundation that enables you to fulfill your fiduciary duty of ensuring fees are reasonable and services are appropriate. Without this information as the starting point, you cannot determine the plan costs!

The Power and Necessity of Benchmarking

Are your plan’s fees expensive? The answer is… compared to what?

Having fee and service disclosures is only the start. The real assessment comes from what you do with that information, which is where reviewing vendor fees, services, and benchmarking the plan comes in. This process involves taking a deep dive into the fees charged by all your service providers, like recordkeepers, investment managers, third-party administrators, and others, and critically assessing the quality and scope of services you're receiving for those fees, in parts and the whole.

Benchmarking takes this evaluation further by comparing your plan's fees and services against similar plans of similar size, industry, and complexity. Establishing the right benchmarking group is an art and a science to ensure a proper comparison. You don’t want to compare your plan against a more complex one or with four times as many employees or in an industry with much higher turnover. This comparison helps you determine whether your fees are competitive, whether you're receiving industry-standard services, and whether or where you’re receiving extra value. The process isn't just about finding the cheapest option; it's about ensuring you're getting value for what your plan and participants are spending.

From a fiduciary responsibility perspective, benchmarking is how you prove you're meeting your ERISA obligations. It demonstrates that you've exercised the care, skill, prudence, and diligence that a prudent person acting in a similar capacity would use. Should your plan be audited, or if participants raise questions about plan management, this documentation is your lifeline.

From a cost control standpoint, identifying and addressing excessive or hidden fees can significantly improve retirement outcomes for your participants. Every dollar saved in fees compounds over time, potentially adding thousands to each employee's retirement account balance. The impact of seemingly small fee reductions becomes dramatic when viewed over a 20 or 30-year career.

Service quality is a critical dimension of benchmarking. Cost is only an issue in the absence of value, or rather, fees exist in context. A higher fee might be justified if it comes with superior service, better technology, or more comprehensive participant education. Conversely, a low fee that comes with little to no service can create operational headaches and divert staff time that far exceeds any savings.

Common Pitfalls That Undermine Success

Even organizations with good intentions often fall into traps that undermine their benchmarking efforts. One of the most common mistakes is rarely conducting benchmarking. Some plans go years and years without conducting fee and service reviews, allowing their arrangements to become stale and uncompetitive. Best practices suggest every 3-5 years for more formal benchmarking, and annually reviewing plan fees.

Another frequent error is chasing the lowest possible price without considering the value of services provided. This is a trap! Small fee savings might come at the expense of important services, participant education, or administrative support quality, which could all cost you more in the long run. The goal should be reasonable fees for the services received, not necessarily the cheapest available option!

Many plan sponsors forget about the hidden fees within their plans. It's easy to focus on visible administrative fees while overlooking revenue-sharing arrangements embedded within investment expense ratios or other forms of indirect compensation. This incomplete picture can lead to miscalculating the actual cost of the plan and missing potential conflicts of interest.

Red Flags: Is Your Advisor Dropping the Ball?

The quality of your retirement plan advisor significantly impacts your ability to fulfill your fiduciary obligations effectively across the board. Unfortunately, many advisors fall short in their benchmarking and fee evaluation responsibilities, leaving plan sponsors vulnerable and potentially overpaying for services. The harsh reality is that if your advisor isn't proactively helping you, you don't just have a service problem; you have the wrong advisor entirely. Here’s how to know.

Lack of Transparency and Proactive Communication: Your advisor should never use vague language or be reactive instead of proactive. They should provide clear breakdowns of their services, the plan’s services, and explain all charges. If they're not proactively discussing fees and bringing them to your attention during review meetings, that's a concern.
Difficulty Obtaining Detailed Benchmarking Reports: Good advisors can easily provide benchmarking reports that compare your plan against a group of similar plans – similar in size, industry, and features. If reports are limited in scope, use non-comparable data, or lack a clear methodology, that's a significant red flag.
Focusing on Low Cost Over Value: As discussed, the lowest price isn't always the best solution. Your advisor should be focused on ensuring your organization's and participants' needs are met through quality services at a reasonable price, not just the absolute lowest fee.
Inability to Explain Fee Construction: Your advisor should be able to easily explain how your plan is constructed from a fee standpoint, including the impact of revenue-sharing payments or investment changes on overall costs. Surprises about plan cost changes due to investment menu adjustments are unacceptable.

The Path Forward: Your Fiduciary Responsibility

Your fiduciary responsibility is on you–ultimately, the legal obligation rests with you as the plan sponsor. You can’t hand it all off to an advisor or your service providers. Fulfilling your fiduciary duties requires ongoing diligence in overseeing all plan costs and services. Working with a specialized retirement plan advisor versus an inadequate one can mean all the difference between confident compliance and costly liability exposure. If your current advisor isn’t cutting it, it’s time to find a specialist.

A high-quality retirement plan advisor will be transparent, an expert, and an aggressive advocate for you. They provide clear documentation of their due diligence processes, not because they have to, but because they understand it's fundamental to protecting your interests. They actively negotiate on your behalf because they view your success as their success. They help you maintain comprehensive records not as an administrative burden, but as protection for your organization.

If you're recognizing significant gaps in your current advisory relationship, the solution isn't to try to educate or reform an inadequate advisor—it's to find one who already understands these responsibilities and has the expertise to execute them properly. Remember that this oversight isn't just about compliance. It's about maximizing one of your employees' most valuable benefits. A well-managed retirement plan with reasonable fees and quality services can significantly impact your employees' financial security and their perception of your organization as an employer that genuinely cares about their long-term well-being.

Time for a change? At Retirement Planology, we specialize in partnering with employers like you to make wise decisions about your retirement plan's construction and ongoing management. If you're struggling to understand your plan's fees, are unsure about benchmarking, or recognize any of the red flags discussed, don't hesitate to reach out. We can help you gain clarity, ensure compliance, and optimize your plan for the benefit of your organization and your valuable employees.

Courtenay Shipley