Understanding Fees on Qualified Retirement Plans

When it comes to paying fees to the professionals who help administer a company’s qualified plan, there are different options available to the plan trustees. Each method impacts the plan and its participants, and it is important for plan sponsors to understand their options so that they can make an informed decision. Professionals who are compensated include third-party administrators, recordkeepers, and investment advisors. 

Each year our partners at Vanguard conduct a survey of the over 18,000 plans that are on their platform. Aside from many different data points that are collected—such as average plan size, employer match and percentage of Safe Harbor plans—a section of the report is dedicated to how fees are paid. 

Aside from explaining the different billing methods below, we have also included recent findings from the annual survey.  

Employee Paid Fees 

Pro Rata

Fees are deducted based upon the account balances and, therefore, the participants who have the largest balances in their 401k account will pay the highest percentage of fees each year.

96% of the plans that participated in Vanguard’s America Saves annual survey selected this billing method.

Per Capita

Fees are paid equally among participants. Under this arrangement, participants who have the lowest account balances are paying a higher percentage of the fees compared with participants who have the largest account balances.

2.9% of the plans that participated in Vanguard’s America Saves annual survey selected this billing method.

Employer Paid Fees 

The annual fees are paid directly by the employer to the professionals who provide services to the company plan.

1.1% of the plans that participated in Vanguard’s America Saves annual survey selected this billing method.   

A Combination

Some fees will be paid by the employer and the balance will be deducted from the participants’ accounts, using either the Pro Rata or Per Capita method.

The annual fees cover a wide range of services that professionals are providing to the plan. Examples of such services include fees paid to the recordkeeper, third party administrator (TPA), and the investment advisor. It is the trustee’s fiduciary duty to monitor those annual fees and make sure that they are reasonable. If the fees charged by the professionals are deemed unreasonable, the plan trustees could be opening themselves to potential liability.