Who pays your 401(k) recordkeeping fee?

Every 401(k) has a recordkeeping fee. It is paid by the company, by participants directly, or through the funds. Here is how to find out which, and why the answer matters.

Every 401(k) plan has a recordkeeper. It is the company that tracks each employee's account, processes payroll contributions, runs the website, and sends the statements. That work costs money. The question most business owners cannot answer quickly is who pays for it, and how.

The three ways the fee gets paid

The company pays by invoice. The recordkeeper bills the employer, usually quarterly. The cost is visible, it is generally a deductible business expense, and it does not come out of employee accounts.

Participants pay as a line item. The fee is deducted from each account and shown on the statement. It can be a flat dollar amount per person or a percentage of the balance.

The funds pay it. Part of each fund's expense ratio is passed to the recordkeeper. This is called revenue sharing. Participants still pay, because the cost is built into the funds they hold, but nobody sees a bill.

Many plans use a mix of the three.

None of these is wrong

Paying through the funds can keep things simple for a small plan, and it means the employer writes no check. The tradeoff is that the cost usually grows as balances grow, even when the service does not change. A plan with twice the assets does not take twice the work to keep records for.

Revenue sharing also falls unevenly. Different funds pass along different amounts, so two employees with the same balance can pay different amounts toward the same service, depending on which funds they picked.

A flat per-person fee has its own tradeoff. It is easy to understand, but it weighs more heavily on a new employee with a small balance than on a long-tenured one with a large balance.

Why the employer needs to know

Under ERISA, fees paid from plan assets have to be reasonable for the services provided. The plan fiduciary, usually the employer, is responsible for knowing that they are. Reasonable does not mean cheapest. It means the employer understands what is being paid, to whom, and for what, and has compared it to fee structures for comparable plans.

That is hard to do if the fee is a percentage buried in fund expenses that no one has ever converted to a dollar figure.

Where the answer is written down

*Since July 1, 2012, the Department of Labor's 408(b)(2) regulation has required covered service providers to give the plan a written disclosure of their direct and indirect compensation. Your recordkeeper has one for your plan. So does your advisor.

So the answer already exists on paper. Ask for the current 408(b)(2) disclosure.

How to read it

Look for three things:

1. Direct compensation. Amounts paid from the plan or billed to the company.
2. Indirect compensation. Amounts the provider receives from the funds or from other parties because of your plan. Revenue sharing shows up here.
3. The services covered. What the provider says it does for that money.

If the recordkeeping cost appears as a percentage, convert it to dollars once. Multiply the percentage by plan assets, then divide by the number of participants with a balance. A cost per person per year is far easier to judge than a fraction of a percent.

Questions to ask your provider

• Who pays the recordkeeping fee today: the company, the participants, the funds, or a mix?
• What was the total in dollars last year?
• If the funds pay more than the recordkeeper's required fee, where does the extra go? Is it credited back to participants?
• Has the fee been compared to other providers in the last three years?

None of this requires changing anything. It requires knowing the number.

If you would like a second set of eyes on your disclosure, start a conversation.

*Source: 29 CFR 2550.408b-2, U.S. Department of Labor, effective July 1, 2012.