80% of 401(k) plans are overpaying on administrative fees, facing ERISA non-compliance
New research findings raise an important question for employers: Are your retirement plans truly supporting your employees, or are they costing them more than they should?
Nearly 80% of companies with 100 or more employees are overpaying on 401(k) and 403(b) plan administrative fees, according to findings from Abernathy Daley 401k Consultants, a consultancy in 401(k) plan administration and employee education. This indicates that many companies are likely not benefiting from an independent benchmark of their corporate retirement plans, failing to capitalize on fee reductions over the last three years.
Along with the concerns of overpayment, the lack of realignment with best practices in fees indicates that companies are overall not conducting regular compliance-related benchmarking of their retirement plans, opening the door to risks.
Benchmarking audits “compare the fees, administrative services, and investment offerings of a company’s plan to industry standards,” said Steven Abernathy, Principal and Chairman of Abernathy Daley 401K Consultants. “The goal is to ensure that the plan is competitively priced, adheres to best practices, and aligns with fiduciary responsibilities.
“By conducting these audits, employers can identify areas where they might be overpaying for plan administration or investment options and where they could improve the plan to better serve their employees.”
Frequently identified compliance risks, according to Abernathy, include:
- Non-compliance with Employee Retirement Income Security Act (ERISA) reporting requirements mandated by the U.S. Department of Labor, which require 401(k) plans to provide clear disclosures on fees and investment options. Employers found to be overcharging employees may face penalties, lawsuits, or other legal repercussions.
- Improperly designed and/or implemented plans, most often associated with profit-sharing-related components of retirement plans.
- Misalignment with internal governance regarding eligibility to participate or contribute to plans based on full or part-time employment.
- Failures to properly reconcile alternative plan structures, such as Cash Balance Plans, which involve complex compliance testing.
Abernathy-Daley’s findings are based on an in-depth analysis of Form 5500 filings, a U.S. Department of Labor and Internal Revenue Service annual reporting requirement. Of the 6,566 companies with more than 100 employees reviewed, 5,241 reported administrative costs greater than the most efficient baseline costs broadly available.
“Our proprietary analysis of a vast swath of Form 5500 data clearly indicates a majority of companies are likely overpaying what’s necessary for plan administration fees,” said Abernathy.
Retirement plan administrative fee pricing is based on the number of employees and asset totals. According to Abernathy-Daley, if a corporate 401(k) plan pays over 0.3% for administrative costs based on the total assets in the plan, the organization is likely overpaying by tens of thousands to hundreds of thousands of dollars, depending on the total assets.
“The discrepancy between what companies are paying and the more affordable options available is striking,” said Matthew Daley, president of Abernathy-Daley. “Our interviews and reviews of nearly two dozen companies confirm that a lack of third-party benchmarking is a key contributor. Without benchmarking, overspending often goes unnoticed, which increases the likelihood of compliance failures.”
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Recommendations for course correction include ensuring retirement plan benchmarking is conducted annually by a third party acting as a legal fiduciary, said Abernathy. “This ensures that employers keep up with ongoing changes in the financial services industry, including advancements in technology that reduce costs and increase efficiency,” he said. “By performing audits regularly, employers can quickly address any discrepancies or inefficiencies, keeping their retirement plans aligned with fiduciary duties and avoiding potential legal risks.”
“HR leaders, CFOs, and other executives may not realize how fee structures, best practices, and technology have evolved in recent years to enable a less expensive and more compliant offering,” continued Abernathy. “It’s important for these leaders to become educated and take steps to ensure they minimize legal and financial risks.”